| Where is Inheritance Tax in Spain payable?

In general terms, Inheritance Tax in Spain is payable in the Autonomous Community where the deceased had his or her habitual residence.

What do we mean by habitual residence for Inheritance Tax in Spain purposes?

Article 28 of Law 22/2009 of 18 December 2009, which regulates the financing system of the Autonomous Communities under the common system and Cities with a Statute of Autonomy and amends certain tax rules, establishes that natural persons resident in Spanish territory are so resident in the territory of an Autonomous Community in the following cases:

1. When they remain in its territory for more days than the period of the five immediately preceding years, ending on the day prior to the day on which accrual occurs

Temporary absences shall be taken into account for the purpose of determining the period of residence.

In the absence of proof to the contrary, a natural person shall be considered to remain in the territory of an Autonomous Community when his or her habitual residence is located in that territory, this being defined in accordance with the provisions of the regulations governing Personal Income Tax.

2. When it is not possible to determine the permanence referred to in the previous point, they shall be considered to be resident in the territory of the Autonomous Community where they have their main centre of interests, this being considered to be the territory where they obtain most of their personal income tax base.

3. Where residence cannot be determined in accordance with the criteria set out in points 1 and 2 above, they shall be deemed to be resident in the place of their last declared residence for personal income tax purposes.

Having said the above, we can draw the conclusion that, in the case of acquisitions by heirs due to the death of the deceased, Inheritance Tax must be processed in the Autonomous Community where the deceased had its habitual residence.

What happens to non-residents in Spain or in the territory of an Autonomous Community for Inheritance Tax purposes in Spain?

Non-resident citizens must also settle (and if applicable pay) Inheritance Tax in Spain.

Until 31 December 2014, citizens not resident in Spain, but EU residents, had suffered discrimination in the application of Inheritance Tax in Spain, since in similar cases, non- residents in Spain had to pay a higher Inheritance Tax (and also donations) than they would pay if they were resident, since State legislation was applied, which was much more burdensome than the legislation of the Autonomous Communities.

Following the Judgment of the Court of Justice of the European Union of 3 September 2014 (case C-127/12) this tax discrimination between EU residents and non-EU residents comes to an end, and it is from 1 January 2015 when an amendment to the law regulating Inheritance and Gift Tax in Spain comes into force.

Thus Law 26/2014, of 27 November, in its Third Final Provision, modifies the Second Additional Provision of the Inheritance and Gift Tax Law, which now has the following wording, which, due to its importance, is transcribed below:

“Second additional provision. Adaptation of the tax regulations to the provisions of the Judgment of the Court of Justice of the European Union of 3 September 2014 (Case C- 127/12), and regulation of the declaration and settlement of taxpayers who must pay taxes to the State Tax Administration.

One. Adaptation of the tax regulations to the provisions of the Judgment of the Court of Justice of the European Union of 3 September 2014.

1. The settlement of the tax applicable to the acquisition of goods and rights for any lucrative title in the cases indicated below shall be in accordance with the following rules:

a) In the case of the acquisition of assets and rights by inheritance, legacy or any other inheritance title, if the deceased had been resident in a Member State of the European Union or the European Economic Area, other than Spain, taxpayers will be entitled to the application of the specific regulations approved by the Autonomous Community in which the highest value of the assets and rights of the estate located in Spain are located. If there are no assets or rights located in Spain, the rules of the Autonomous Community in which the taxpayer resides shall apply to each taxpayer.

b) In the case of the acquisition of assets and rights by inheritance, legacy or any other inheritance title, if the deceased had been resident in an Autonomous Community, non- resident taxpayers who are resident in a Member State of the European Union or of the European Economic Area shall be entitled to the application of the specific regulations approved by that Autonomous Community.

c) In the case of the acquisition of immovable property situated in Spain by donation or any other legal transaction free of charge and “intervivos”, non-resident taxpayers who are resident in a Member State of the European Union or of the European Economic Area shall be entitled to the application of the specific regulations approved by the Autonomous Community where the said immovable property is located.

d) In the case of the acquisition of immovable property located in a Member State of the European Union or of the European Economic Area, other than Spain, by donation or any other legal transaction free of charge and “intervivos”, taxpayers resident in Spain will be entitled to the application of the specific regulations approved by the Autonomous Community in which they reside.

e) In the case of the acquisition of movable property situated in Spain by donation or any other legal transaction free of charge and “intervivos”, non-resident taxpayers who are resident in a Member State of the European Union or of the European Economic Area shall be entitled to the application of the specific regulations approved by the Autonomous Community where the said movable property has been situated for the greater number of days in the period of the five immediately preceding years, counted from date to date, ending on the day before the day on which the tax becomes chargeable.

2. For the purposes of the provisions of this Article, natural persons resident in Spanish territory shall be deemed to be so resident in the territory of an Autonomous Community when they remain in its territory for the greater number of days in the period of the five immediately preceding years, counted from date to date, ending on the day before the accrual date.

3. When in a single document different assets or rights are donated by the same donor to the same donee and by application of the rules set out in section 1 above the regulations of different Autonomous Communities are applicable, the tax payable shall be determined as follows:

1. The average rate resulting from applying the State regulations and those of each of the Autonomous Communities in which part of the assets and rights in question are located or situated to the value of all the assets and rights donated shall be calculated.

2.° The average rate obtained by applying its own regulations shall be applied to the value of the assets and rights that are located or situated in each Autonomous Community, from which a tax liability to pay shall be obtained, corresponding to said assets and rights.

Two. Regulation of the declaration-settlement of taxpayers who must pay taxes to the State Tax Administration.

Taxpayers who have to fulfill their obligations for this tax to the State Tax Administration shall be obliged to submit a self-assessment, carrying out the necessary operations to determine the amount of the tax debt and accompanying the document or declaration in which the taxable event is contained or established. When submitting their self- assessment, they shall pay the resulting tax debt in the place, in the manner and by the deadlines established by regulation by the Minister of Finance and Public Administrations.

According to the above, the European Courts allowed EU residents to apply the tax benefits that the Autonomous Communities recognise for residents in their territory.

Can non-EU residents apply the benefits and exemptions of Inheritance Tax in Spain according to the Autonomous Community where they have a connection?

With the modification of the law as of 1 January 2015, the legislator left non-EU (or European Economic Area) residents out of Inheritance Tax in Spain, making an interpretation more favourable to the collection interests of the State than to the interpretative principle more favourable to the taxpayer of the European ruling.

However, since 2018, the Supreme Court (in various rulings) has been ruling in favour of non-EU taxpayers, who have been disadvantaged compared to EU taxpayers resident in Spain.

In accordance with the rulings of the Spanish High Court, the Tax Agency, through the Directorate General for Taxation, has issued several binding consultations establishing that the legal regime regulated in the second additional provision of the Law governing Inheritance and Gift Tax in Spain must be understood as applicable to all non-residents, whether they are resident in a Member State of the European Union or the European Economic Area, or in a “third country”.

Below is a small summary table of the applicable law in different cases, depending on the tax residence of the deceased, of the heirs and depending on where the assets are located:

From Welex, we recommend you to hire the services of a lawyer specialized in Inheritance Tax in Spain to know all the details of this tax as well as all the procedures derived from an inheritance in Spain. Do not hesitate to contact us now.

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