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European Court of Justice rules against Spain’s Form 720 fines and imprescriptibility

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7 Feb 2022

The Court of Justice of the European Union (case C-788/19) concluded on 27 January 2022 that Spanish legislation regulating tax form 720 is contrary to EU law, restricting free movement of capital.

In particular, the Court declares that Spain has breached the Law with regards to the following three issues raised in the proceedings:

  • Non-applicability of statutory limitation period
  • Disproportional penalty of 150% linked to unjustified capital gains tax
  • High flat-rate fines for failure to submit the tax declaration

Since 2012, Spanish tax residents must report to the tax authorities on assets held abroad exceeding 50.000 euros, using tax form 720.

Unreported assets and inaccurate, false or out-of-time filling will lead automatically to the assumption of those assets to be unjustified capital gains, unless the taxpayer can prove ownership prior to becoming tax resident, or taxes paid on taxable income used to acquire those assets while being resident. The consequences are a capital gain taxed at the top marginal rate (45% minimum), a penalty of 5.000 euros per missing or inacurate data is imposed with a minimum of 10.000 euros, plus a penalty of 150% on the capital gain tax liability.

The statutory limitation period for taxes in Spain is 4 years (5 in case of tax crime, for debts above 120.000 euros, or 10 years for more than 600.000 euros). This is not applicable to unjustified capital gains raised from the tax form 720, which never expires causing deffencelessness to taxpayers.

These measures were approved to discover hidden assets held abroad and to punish tax evaders. In 2012 there was still bank secrecy in Switzerland and Common Reporting Standard was not approved. Today, most of the information required to be reported is already exchanged by Governments and financial institutions and, ironically, the majority of the taxpayers that have fallen in the tough application of this regulation are foreigners that have retired to Spain, who are unable to prove the source of an asset held for more than 20 years just because it simply exceeds any obligation to keep records.

The European Commission started the EU infringement proceedings in November 2015, and brought the matter to the EU Court of Justice in June 2019. It has taken a lot of time but finally common sense has prevailed.

The Spanish Government has not reacted yet. Form 720 is not questioned but the three issues above mentioned; thus, the obligation to report in March 2022 for fiscal year 2021 is still in place.

Claiming for refund of taxes and fines

Pursuant to the judgment, those taxpayers who have their cases still unresolved, at the Administrative or even the Contentious Court, will have a clear possibility of success.

For those who cannot escalate more because they have a final judgment, their option is to hold the State liable and claim for patrimonial responsibility, regulated by Law 40/2015. This process is complex and the European Commission opened an infringement procedure against Spain on this matter too, and a resolution from the European Court of Justice (ECJ) declaring the regulation against European laws is expected to follow within next 5 months.

The claim for responsability to the State can be made within one year after the date the ECJ judgment is published.

There are many different scenarios and each case must be studied and analyzed separately.

JC&A Abogados have a proven large experience dealing with tax form 720 and its consequences with some sounded cases, highlighting the case where we saved our client circa 1.300.000 euros from the 150% penalty imposed by a tax inspector in 2016.

We have experience as well on claiming for patrimonial responsibility to the State, as we did against inheritance tax pursuant to the ECJ judgment of 3 September 2014 (case C-127/12).

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