The European Commission opens infringement proceedings against Spain challenging the income tax rules re. capital gains realized by non-residents

In first half of December 2021 the European Commission opened infringement proceedings by sending a letter of formal notice to Spain requesting to align its rules concerning the taxation of capital gains realized by non-resident taxpayers with the free movement of capital (Article 63 of the Treaty on the Functioning of the European Union).

Background

In case of capital gains, which result from transfer of assets when the payment is deferred longer than a year or is paid in instalments in a period longer than a year, Spanish resident taxpayers have the option to pay the tax liability at the time the capital gains accrue or to defer it and pay it proportionally based on the cash flow.

However, non-resident taxpayers are not offered this option of deferral and have to pay the tax when the capital gains accrue at the time of the transfer of the assets.

The infringement procedure begins with the sending of a letter of formal notice in which the Commission informs the Spanish authorities about the issues identified.

Spain has two months to reply to the arguments raised by the Commission. After that, if the Commission is not satisfied with the response, it may decide to send a reasoned opinion or formal request to adapt the Spanish rules to the law of the European Union, granting two additional months for dialogue. If no solution is reached, the Commission will bring the case before the European Union Court of Justice.

Key takeaways

It is recommended to review previous transfers of assets subject to Non-Resident Income Tax where payment of the consideration was deferred for longer than a year and to monitor ho the developments evolve.

If the European Union Court of Justice finally concludes that the Spanish rules on capital gains subject to Non-Resident Income Tax are not aligned with the principle of free movement of capital it should be possible to claim delay interest for the amounts that were paid in excess between the moment the capital gain was accrued (and payment of the tax was due) and the different installments.