The Spanish penalty regime applicable to information duties relating to assets located abroad – the European Union's position

The Spanish Authorities, making use of the possibility afforded by the procedure, had not made public this Reasoned Opinion until 15 October 2018, following an injunction from the Spanish "Audiencia Nacional".

In essence, neither the Reasoned Opinion, nor the previous formal letter of notice, call into question Spain's right to impose information duties, such as the ones in Form 720, as a way of preventing fraud, abuse and tax evasion and of improving the efficiency of tax controls. However, the Reasoned Opinion does challenge the proportionality of the legal configuration of these duties and of the penalties associated to them.

The penalty regime, contained in Law 58/2003, dated 17 December, (the Spanish General Tax Act – "GTA"), provides for fixed monetary fines in cases of non-compliance or incorrect compliance with the duties in Form 720 (known as the "formal penalty"). Moreover and as a result of the changes introduced by Law 7/2012, dated 29 October, amending tax and budget legislation, the GTA also provides that undeclared assets located abroad should be treated as capital gains attributable to the last tax period not covered by the statute of limitations. A 150% penalty is then also imposed on the failure to pay the tax associated with these capital gains (known as the "material penalty"). This tax treatment results in there being no statute of limitations for information duties associated to Form 720. Both penalties, "material" and "formal", derive in fact from the same failure: the failure to fulfil adequately the information duties in relation to assets and rights located abroad. Both could be deemed to amount to formal obligations within the meaning of article 20 of the GTA. This would be the first instance of a formal penalty carrying such a heavy fine.

The Commission considers that this penalty regime fall foul of up to six articles of the Treaty on the Functioning of the European Union ("TFEU") and four articles of the Agreement on the European Economic Area ("EEA"). These articles protect EU fundamental rights and freedoms, such as the free movement of persons and of workers, the freedom of establishment and freedom to provide services, free movement of capital. The Commission's arguments centre on three main issues:

Comparability

Following European Court of Justice precedents (such as case C-157/08, Passenheim-van Shoot), the European Commission considers a Spanish resident taxpayer, with assets and rights in Spain, is in a situation comparable to a taxpayer investing in rights and assets located outside Spain and even of a newly resident taxpayer who maintains his or her assets abroad. Given this comparability, imposing tax obligations and penalties in only one of these cases amounts to an inadmissible difference in treatment.

Moreover, the Spanish Tax Authorities can simply ignore the principle of culpability and presume that the ownership of assets located abroad is only for reasons of tax fraud. The position taken by the Spanish Tax Authorities' does not allow to simply consider that it is the result of legitimate exercise of the freedoms protected by the TFEU and the Commission.

Limitations

The Spanish regulations called into question impose a greater tax burden on the taxpayer obliged to file Form 720 and also a greater compliance and formal burden. Thus, these taxpayers must monitor the values of their assets and rights abroad in order to determine whether such assets exceed the threshold for the information duties to kick in. This burden can become more significant, in cases such as split ownership or legal differences in the consideration of assets in different jurisdictions.

The Commission takes the view that the complexities of these duties exceeds the provisions of article 65 TFEU. Under such article, Member States limit the free movement of capital, provided such limitation does not amount to arbitrary discrimination. For the Commission, Spanish Regulations exceed the discretion allowed under the TFEU, given that the information required under Form 720 can be obtained through European instruments of administrative cooperation.

Justification of the measures

Any limitation must respect the principle of proportionality. Spain justifies its position on the basis that it requires information on assets ad rights located abroad. However, this argument implies refusing to consider the efficacy of administrative cooperation measures and even CFC legislation, which has been in force in Spain for over twenty years. It amounts to asserting that, without Form 720, Spanish Tax Authorities would have no way of gaining knowledge as to assets owned abroad by a resident taxpayer. As such, therefore, the possibility of disclosing can only fall on the taxpayer (who is also uniquely placed to conceal such assets).

Based on the above, the Commission concludes that Spanish Regulations on Form 720 are discriminatory and disproportionate, in accordance with TFEU provisions and European Court of Justice precedent. Therefore and following article 258 TFEU, the Commission urges Spain to comply with the Reasoned Opinion and modify Form 720 Regulations.

The formal reply of the Spanish Authorities is currently not known. However, the Spanish Directorate for Taxes has accepted that the spirit of these Regulations would in fact determine that surcharges for late filings (article 27 GTA) should apply in these cases, as opposed to the 150% penalty (binding ruling 1434-17, dated 6 June 2017). The High Court of the autonomous region of Castille and León, in its ruling dated 28 November 2018, has also accepted an appeal by a taxpayer against a penalty related to a Form 720 filing. The Court, moreover, ordered the Tax Authorities to pay all the judicial costs. Note, however, that the European Court of Justice must still reach a decision in these infringement proceedings against Spain.