Humphrey Carter04/09/2014 00:00
TW
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Palma.—Europe’s top court yesterday ruled  against Spain in a case that may force the country to lower the lucrative taxation of inheritances involving nonresidents.
The Luxembourg-based European Court of Justice said that, by applying high tax rates in cases where either the deceased or the recipient of the inheritance is a nonresident, the country is in breach of European Union treaties. In inheritances involving Spanish residents only, such rates are much lower.
A court spokesman said Spain must comply with the ruling, but it is unclear when the country will incorporate it in its legislation. A spokeswoman for Spain’s Budget Ministry, which is in charge of tax issues, did not immediately respond to a request for comment.

First told in 2010
The European Commission first told Spain to change its legislation regarding inheritance and donation tax in 2010 and, after Spain failed to comply, it brought the case before the European court.
The alleged discrimination is a result of the complex setup of inheritance tax management and collection in the country. Spain’s regional governments manage and collect these taxes, and many regions have mechanisms in place that sharply reduce or even eliminate the effective inheritance tax rate locally.
However, regions only apply these rules in cases where both the beneficiaries and donees are local residents.
When nonresidents are involved, higher rates contemplated in national law are applied.
The ruling is significant for Spain, where about 14% of a population of 46 million is foreign, one of the highest percentages in the EU.
According to a report by DMS Consulting, a local consultancy, Spain’s current legislation has led to “very serious” discrimination when it comes to the payment of inheritance taxes.

Balearic example
Using the example of the Balearics - where 20% of residents are foreign, the largest percentage of any Spanish region, and many are elderly Europeans with children living in other countries - DMS Consulting said an inheritance tax rate of 1% is commonly applied to residents, while those involving nonresidents vary between 7% and 34%.