The Court of Justice of the European Union rules on the obligation to provide information on assets and rights abroad (Form 720).

The Court of Justice of the European Union (CJEU), in its judgment of January 27, 2022, concluded that a significant portion of the consequences associated with non-compliance with the obligation to declare assets and rights held abroad by residents of Spain (Form 720) are contrary to European Union law, as they constitute an unjustified restriction on the free movement of capital. The Government will have to approve a new configuration of the penalty system and a new statute of limitations applicable to Form 720, the filing period for which for the 2021 tax year began on January 1 and ends on March 31. This ruling has significant substantive implications and requires analysis of each specific case.

We are writing to inform you that a highly anticipated and important ruling of January 27, 2022, in case C-788-19, represents a significant setback for the Spanish tax system. The Court of Justice of the European Union (CJEU) has ruled that Form 720, which requires individuals to declare assets and rights located abroad, and the resulting system of penalties, are contrary to EU law. According to the European Court of Justice, Spain imposes excessive penalties on citizens who fail to comply with this obligation or make errors in their declarations, thus violating the principle of free movement of capital. The anti-fraud measures, the judges ruled, are disproportionate to the objective pursued and create excessive hardship for citizens. Furthermore, the Court considers it unlawful for the regulation to create a situation of imprescriptibility with respect to assets and rights located abroad simply for failing to comply with a formal obligation.

THE OBLIGATION TO DECLARE ASSETS AND RIGHTS ABROAD

The General Tax Law regulates the obligation of residents in Spain to file an annual information return (Form 720) regarding their assets and rights held abroad. Specifically, they must report on accounts in financial institutions, securities (shares and stock in companies), life or disability insurance, annuities and temporary annuities, and finally, real estate assets and rights. These assets and rights (their ownership and changes in value) must be declared if certain thresholds are reached, and the disposal of assets and rights declared in previous years must also be reported. All of this is subject to certain exceptions regulated by law.

Failure to file the declaration, or filing it late or with false or inaccurate information, can have two types of consequences:

1. On the one hand, there are "formal" sanctions (at a rate of 5,000 or 100 euros per piece of data or set of data with a minimum of 10,000 or 1,500 euros), depending on whether the declaration is not submitted or is submitted incorrectly, or is submitted late.
2. On the other hand, the Personal Income Tax (IRPF) and Corporate Income Tax laws stipulate that when a tax return is filed late or not filed at all, the value of assets and rights will be imputed as an undeclared increase in net worth or income, unless it is proven that they were acquired with declared income or when the taxpayer was not a resident. In these cases, a penalty of 150% may also be imposed on the resulting tax liability.

THE CJEU'S RULING

In November 2015, the European Commission initiated infringement proceedings against Spain (2014/4330) concerning Form 720, followed by a reasoned opinion in February 2017. Finally, it brought an action before the CJEU in October 2019 (case C-788/19), in which it requested a declaration that Spain had infringed the fundamental freedoms of the Treaty on the Functioning of the European Union and the Agreement on the European Economic Area.

In its judgment, the CJEU has concluded in the sense defended by the European Commission and affirms that Spain has failed to comply with its obligations under the principle of free movement of capital for the following reasons:

1. Because non-compliance or imperfect or untimely compliance with the obligation entails the taxation of undeclared income without the possibility of the subject taking refuge in the acquired prescription.
2. Because it penalizes such behavior with a penalty of 150% of the fee corresponding to that imputation of undeclared income, which can also be combined with fixed-amount fines.
3. Finally, because it penalizes these breaches with fixed, unlimited fines that are disproportionate to the penalties provided for in a purely national context.

In support of these conclusions, the CJEU states:

1. Although the legislation may be justified to ensure the effectiveness of tax control and the fight against fraud, it goes beyond what is necessary.
2. The mere fact that a resident owns assets or rights abroad cannot form the basis for a general presumption of fraud or tax evasion. Furthermore, a rule that presumes fraudulent behavior simply for failing to meet the requirements it establishes, without any possibility of rebutting that presumption, goes beyond what is necessary for the stated objective.
3. Furthermore, while invoking the statute of limitations regarding the acquisition of assets and rights does not preclude potential fraud, it is inadmissible for the tax authorities to challenge statutes of limitations that have already expired, as this violates the principle of legal certainty. Although it is permissible for the legislature to regulate an extended statute of limitations in certain cases, it is not valid for the tax authorities to act without any time limit, especially when this is established for cases of mere non-compliance with a formal obligation.

IMPLICATIONS OF THE SENTENCE

The long-awaited ruling by the CJEU means that the described sanctions can no longer be imposed, nor will the statute of limitations apply. The ruling does not affect the obligation to file Form 720, which must still be fulfilled, where applicable.

The ruling compels the Spanish State to reform its legislation in accordance with the European judges' decision. In this regard, the Government must approve a new configuration of the penalty system and a new statute of limitations applicable to Form 720, the regulatory filing period for which for the 2021 tax year began on January 1st and ends on March 31st. The Tax Agency has indicated that it will modify this form before March 31st, so it will be important to pay attention to developments over the next two months.

Finally, we will have to wait to see and analyze the consequences of this ruling, but it opens the door to recovering the money from the fines, whether or not they were appealed and even if the deadline has expired.

The effect on past situations will have to be analyzed on a case-by-case basis, depending on the procedural status of the case. The ruling will apply to pending proceedings and appeals. It will also allow for the correction of self-assessments and the refund of undue payments. In certain situations, it would also open the door to claims for damages against the State.

You can contact this professional office for any questions or clarifications you may have.

Warm regards,

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MGI Àmbit

A Àmbit Assessor, SL has 40 years dedicated to the tax, comptable and labor consultancy of the Pime.

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