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INTERNATIONAL - SPAIN: Foreign nationals can sue government over inheritance tax discrimination, following Supreme Court ruling

Spain's historic practice of charging higher inheritance tax to residents of third countries is unlawful even if the third country is not in Europe, the country's Supreme Court has ruled.

The judgment renders the government liable to claims for refunds of all discriminatory taxes paid in the past four years. A European Court of Justice (ECJ) decision in September 2014 (C-127/12) granted that right to residents of European Economic Area (EEA) countries, but it now applies to residents of all other third countries.

The situation has arisen because Spain's regional authorities have considerable autonomy in tax matters. Although inheritance tax is imposed by the Madrid central government, the regions have long granted very substantial tax reliefs - sometimes 99 per cent – to the estates of persons living in their region, and their heirs. These reliefs were not granted to estates (or gifts) where either the donor or recipient was a non-resident.

This system was challenged by the European Commission in 2010, but Spain ignored the Commission's request for reform, being reluctant, for political reasons, to interfere in regional affairs. However, the Commission then referred it to the ECJ, which in 2014 ruled that Spain was acting unlawfully, at least in regard to citizens of the EU and the European Economic Area (ECJ C-127/12). The judgment did not refer expressly to citizens of other third countries.

In January 2015, Spanish law was changed remove the discrimination against other EU and EEA country residents. The legal battle continued on behalf of non-EEA citizens, and has now reached the Supreme Court. On 19 February 2018, the court confirmed that the Spanish inheritance tax legal framework was generally unlawful regarding all foreign residents who received Spanish assets through inheritance. Its decision was strongly influenced by another ECJ case, in which a similarly discriminatory German inheritance tax regime was ruled illegal (ECJ, 2013, c-181/12).

The Supreme Court accordingly declared the Spanish state to be civilly liable to IHT victims of discrimination, who are now entitled to damages going back four years – the standard statute of limitations for taxes.

The judgment will have a 'huge impact' on the current Spanish inheritance and gift tax rules, commented Antonio Barba de Alba, of Cuatrecasas Madrid. 'It not only forces the government to amend the current provisions, but it also opens the door for taxpayers to claim refunds of all taxes paid under the discriminatory rules in the past four years.'