In March, as reported by the Majorca Daily Bulletin, the European Commission referred Spain to the European Court of Justice for discriminatory tax treatment of non-residents. The Commission said Spain had infringed the free movement of capital by allowing residents a choice when to pay taxes over a transfer of assets with a deferred payment, while non-residents always have to pay the tax at the time of the transfer of the assets.
However, it appears that Spain took little notice and the European Commission opened an investigation into Spain on Wednesday for discriminatory tax treatment of non-residents, who are required to pay income tax on 2% of the cadastral value of their homes used as their primary residence. The EU executive has urged the Spanish authorities to end this tax, which it considers discriminatory, on homes used as the habitual residence of non-resident individuals.
Brussels has warned that these rules on the taxation of non-resident taxpayers for their homes used as their habitual residence affect the free movement of workers and the free movement of capital. It has emphasised that while resident taxpayers are not subject to income tax on their homes used as their habitual residence, non-resident taxpayers must pay income tax on 2% of the cadastral value of their homes used as their habitual residence as attributable income.
For all these reasons, the Commission has sent a letter of formal notice to Spain, which now has two months to respond and remedy the deficiencies identified by the EU executive. In the absence of a satisfactory response, Brussels may give the government a two-month ultimatum to remove this tax before referring the case to the Court of Justice of the EU (CJEU).
Spain has has the coming for many years. On 2 December 2021, the Commission sent Spain a letter of formal notice followed by a reasoned opinion on 23 May 2024. In its formal replies, and in subsequent technical exchanges with national authorities, Spain has maintained that its tax legislation is in line with EU law. The Commission considers that efforts by the national authorities have, to date, been insufficient and is therefore referring Spain to the Court of Justice of the European Union.
Background
Under Spanish tax law, resident taxpayers can choose to defer capital gains tax when the payment for the transfer of assets is deferred for more than one year or paid in instalments over a period exceeding a year. In this case, the tax is paid proportionally as each instalment of the price is received. This allows for a cash flow benefit, as tax is only paid on the portion of the capital gain corresponding to the payments made.
However, for non-resident taxpayers, the situation is different. Capital gains are taxed on an accrual basis, meaning that the tax is levied in full at the time the asset is transferred, even if the payment is made over an extended period. This means that non-resident taxpayers cannot benefit from the option to defer tax payments, even if they receive the payment in instalments over time. As a result, non-residents face a significant cash flow disadvantage compared to their resident counterparts.
This difference of treatment between residents and non-residents infringes upon the principle of free movement of capital, as outlined in Article 63 TFEU. By imposing a more burdensome tax structure on non-residents, Spanish tax law creates an unjustified barrier to cross-border transactions, which is contrary to the European Union’s objective of promoting the free movement of capital within its internal market.