The obligation to declare assets abroad for Spanish residents
THE Spanish General Tax Statute regulates the obligation of residents in Spain to file an annual informative declaration of their assets and rights abroad, which is done through the so called 720 form.
However, in its judgment dated January 27, 2022 in case C-788-19, the Court of Justice of the European Union (CJEU) states that the fines foreseen for the case of non-compliance with the obligation to file the declaration are disproportionate and that it is not lawful for the regulations to generate a situation without a statutory limitation regarding the nondeclaration of assets situated abroad as a formal obligation and declares that the fines established in Spanish legislation are unlawful.
In its judgment, the Court of Justice declares that Spain has failed to comply with its obligations under the principle of free movement of capital. The obligation to file the 720 form and the penalties resulting from the failure to comply with that obligation, which have no equivalent regarding assets or rights located in Spain, establish a difference in treatment between residents of Spain according to the place where their assets are located. This obligation is liable to dissuade residents of that Member State from investing in other Member States, to prevent them from doing so or to limit their possibilities of doing so, and thus constitutes a restriction on the free movement of capital.
The Court of Justice highlights three main aspects:
First, it considers that Spain has failed to comply with its obligations under the principle of free movement of capital and in the field of the statute of limitations as the penalties are disproportionate since they allow the tax authorities to proceed without a time limit to claim the tax due corresponding to the value of the assets or rights located abroad and which were not declared or were declared incorrectly by means of the 720 form.
What is the statute of limitations? It is defined in Article 1961 of the Spanish Civil Code as the time limit within which actions or claims must be filed before they expire. In the regulations on the 720 form, there was no statute of limitations that limited the time that the tax office had to fine people for non-declaration of the assets or the incorrect declaration of the 720 form which was considered to be unlawful. As such, the Court of Justice indicated that the regulation of the 720 form violates the fundamental requirement of legal certainty.
Secondly, the Court considers that Spain has also failed to comply with its obligations under the free movement of capital by imposing a penalty of a proportional fine of 150% of the tax based on the value of the assets or rights held abroad for non-compliance or incorrect or late compliance with the obligation to provide information on assets and rights located abroad. Additional fixed fines may be applied to each omitted, incomplete, inaccurate or false set of data to be included in the 720 form and can be added to the initial fine itself.
This non-compliance is sufficient to establish the existence of a tax infringement, which is considered to be of a very serious nature and may be punished with a fine of 150% of the amount of tax avoided, a percentage which is not considered as a maximum rate.
The Court also points out that the very high rate of such fines makes it extremely repressive and that to add such a high fine to the fixed-rate fines that are additionally regulated may, in many cases, result in the total amount of the sums owed by the taxpayer to exceed 100% of the value of his assets or rights abroad.
Finally, the Court finds that the Spanish legislation also failed to comply with its obligations under the principle of free movement of capital by penalizing non-compliance of the obligation to provide information regarding assets and rights located abroad with fixed fines, the amount of which are totally disproportionate to the penalties established for similar infringements in a purely domestic context.
However, the judgment does not annul the actual obligation to declare assets and rights situated abroad by means of the 720 form itself, which, although it may have been very useful in the fight against tax fraud, does not constitute a justification of anything being admissible.