Non-residents to benefit from wealth tax shield

Article 31 of the Wealth Tax Act establishes a maximum limit on the tax chargeable to taxpayers resident in Spanish territory (that are taxed on their worldwide assets).

In general terms, the sum of the total wealth tax ("WT") and personal income tax ("PIT") liability cannot exceed 60% of the PIT base (with some exceptions). The rule is intended to prevent the liability for both taxes (WT and PIT) from being excessive to the extent of being confiscatory, forcing taxpayers to sell part of their assets to meet their tax payments. In fact, if applied, the rule may significantly reduce the WT liability, although the reduction is capped at 80%. A similar rule also applies to the temporary solidarity tax on large fortunes.

The case analyzed by the High Court of Justice of the Balearic Islands involved a taxpayer resident in Belgium that filed a WT return as a non-resident (only for assets located in Spain) without applying the rule imposed under article 31 of the Wealth Tax Act. However, the taxpayer started a procedure to request a refund of undue amounts paid, applying the above rule and taking into account the tax base and the amount levied on his PIT in Belgium. This determined the applicable wealth tax rate with the maximum 80% reduction.

On February 1, 2023, the High Court of Justice of the Balearic Islands handed down a judgment (ECLI:ES:TSJBAL:2023:130) in favor of the taxpayer’s claims, qualifying the fact that non-residents were unable to apply the rule imposed under article 31 of the Wealth Tax Act as unreasonable and disproportionate, given that being a resident outside of Spain “cannot justify that the wealth tax applied to them should be confiscatory in nature”.

Particularly, having drawn attention to the primacy of EU law and stating that it was not appropriate to refer the matter to the Court of Justice of the European Union ("CJEU"), the High Court of Justice of the Balearic Islands essentially based its ruling on CJEU judgment of September 3, 2014 (Case C-127/12). The case analyzed whether the Spanish regulations establishing the connecting factors and the application of the regulations approved by the autonomous regions on inheritance and gift tax ("IGT") were contrary to the free movement of capital. The CJEU declared that Spain had failed to fulfill its obligations insofar as, by rejecting the connection of non-residents with an autonomous region, it deprived them of regional advantages, which has resulted in regulatory amendments in terms of IGT and WT.

As mentioned, the High Court of Justice of the Balearic Islands found sufficient grounds in this judgment to consider that EU Law would oblige Spain to take the Belgian PIT into account and apply the joint limit to the taxpayer to determine the WT rate payable despite it only applying to assets located in Spain.

As can be seen, the High Court of Justice accepts that the confiscatory situation may be sufficiently assessed even when WT is not levied on the person's total assets, and that the WT rate can be reduced by a foreign PIT. Therefore, in view of a potential appeal before the Supreme Court or even the CJEU, it is advisable to take the necessary precautions. The possibility of the case being brought before the CJEU cannot be ruled out, as the Court has previously maintained that it is the obligation of the state of residence to take into account the circumstances linked to taxpayers’ personal situation for the purpose of establishing their tax liability (CJEU Judgment of July 5, 2005 Case C-376/03). In fact, this approach potentially puts the case into a different perspective, given that WT regulations, unlike non-resident income tax, do not allow non-residents to be taxed as residents if most of the assets are located in Spain.