Spanish tax legislation contains several cases of tax discrimination in the taxation of non-residents in Spain that are presumed to be contrary to EU law.
On 3 September 2014, the Court of Justice of the European Union (CJEU) ruled against Spain’s Inheritance and Gift Tax (ISD) on the grounds that it was contrary to the free movement of capital to prevent non-resident taxpayers from being able to apply the rules approved by the Autonomous Community where the highest value of their assets in Spain was located. This ruling condemned Spain, which had to make modifications to both ISD and Wealth Tax (IP).
Despite this ruling, we find that the Non-Resident Income Tax (IRNR) discriminates against non-residents from countries outside the EU or the European Economic Area, as is now the case with UK residents after Brexit. When determining the taxable base for income obtained from renting out their property in Spain, these taxpayers must pay tax on the gross income without the possibility of deducting expenses and applying a tax rate of 24%, while non-EU residents can deduct all their expenses and pay tax at a rate of 19% on the net profit.
The same applies to Wealth Tax, which is applied on non-residents who are taxed by real obligation (only on their assets in Spain and when their value exceeds the exempt minimums). Article 31 of this law establishes that the joint Personal Income Tax (IRPF) and Wealth Tax liability cannot exceed 60% of the IRPF taxable base, and if this limit is exceeded, a reduction of 80% of the Wealth Tax liability can be obtained. This benefit, which can be applied by residents in Spain (taxpayers under personal liability), which seeks to avoid the confiscatory nature of the tax by excess, excludes the taxes of non-residents who are taxed under real liability.
Defence against unequal taxation of non-residents
The High Court of Justice of the Balearic Islands, in a judgment of 1 February 2023, ruled in favour of a non-resident taxpayer who filed his Wealth Tax without applying the 80% rebate, but initiated a procedure for the refund of undue income because he considered it unfair not to be able to apply it. The Court essentially bases its position on the judgment of the CJEU of 3 September 2014 indicated at the beginning of this article, so it cannot be ruled out that the rest of the lawsuits filed regarding the cases of tax discrimination in Spain will receive rulings in favour of non-resident taxpayers for being discriminatory and contrary to European Union law.
It is up to law firms in Spain such as ours to continue defending our clients in matters of tax discrimination against non-residents in the Courts before the Spanish Tax Agency until successive rulings force a legislative change that puts residents and non-residents on an equal footing as established by European Union Law in its quest for the free movement of people and capital.