SPAIN to the Court of Justice of the European Union due to discriminatory tax treatment of non-resident taxpayers

The European Commission decided to refer Spain to the Court of Justice of the European Union for having failed to remedy an infringement in relation to the free movement of capital (Article 63 TFEU) due to a discriminatory tax treatment of non-resident taxpayers. When a payment for transfer of assets is deferred for longer than a year or is paid in instalments over a period longer than a year, resident taxpayers may pay the tax either when the capital gain accrues or proportionally deferred on a cash flow basis. However, non-resident taxpayers are not offered this possibility of deferral and must pay the tax when the capital gains accrue at the time of the transfer of the assets.

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.

More Information European Commission.