1. Introduction to Inheritance Tax
1.1. Definition and Purpose
Inheritance Tax is a levy on the transfer of assets and rights due to death. The essence of this tax lies in taxing the wealth increase experienced by heirs or legatees as a result of an inheritance. Therefore, it directly affects the intergenerational transfer of wealth, making it a fiscally significant instrument with social and economic relevance.
1.2. Legal Framework in Spain
In Spain, Inheritance Tax is mainly regulated by Law 29/1987, of December 18, on Inheritance and Gift Tax, and its Regulation approved by Royal Decree 1629/1991, of November 8. This legislation establishes the general framework of the tax at the national level. However, it is crucial to highlight that, under the regional financing system, the Autonomous Communities have broad legislative powers over the tax. This has led to notable inequalities in its application depending on the region, sparking debates on fiscal equity among different areas.
1.3. Legal Evolution for Non-Residents
The application of Inheritance Tax to non-residents has undergone significant changes in recent years, mainly due to court rulings aimed at eliminating discrimination between residents and non-residents:
- Judgment of the Court of Justice of the European Union (September 3, 2014, Case C-127/12): This ruling declared that the Spanish regulations violated the principle of free movement of capital by not allowing non-residents in Spain to benefit from regional reductions in Inheritance and Gift Tax.
- Law 26/2014, of November 27: In response to the ECJ ruling, this law modified the Inheritance and Gift Tax Law, allowing taxpayers who are non-residents in Spain but residents in an EU or EEA member state to apply the tax rules of the Autonomous Community where the highest value of inherited assets and rights in Spain is located.
- Judgment of the Supreme Court (February 19, 2018, Appeal 62/2017): This ruling extended the right to apply regional tax rules to residents of non-EU countries, thus eliminating discrimination between residents and non-residents regardless of their country of residence.
- Law 11/2021, of July 9: This law modified the Second Additional Provision of Law 29/1987, legally consolidating the right of all non-residents to apply the tax regulations of the corresponding Autonomous Community, regardless of their place of residence.
2. Personal Obligation vs. Real Obligation
2.1. Concept of Tax Residence
The concept of tax residence is fundamental in determining how Inheritance Tax is applied. In Spain, a person is considered a tax resident if they meet any of the following conditions:
- They stay in Spain for more than 183 days in a calendar year. Sporadic absences are counted unless tax residence in another country is proven.
- Their main economic interests or activities are based in Spain, directly or indirectly.
- Presumption of residence: If their spouse (not legally separated) and minor dependent children habitually reside in Spain.
This concept is further defined in Spanish tax law.
2.2. Characteristics of Personal Obligation
Personal obligation applies to tax residents in Spain. The main features are:
- Worldwide Scope: Taxpayers are subject to Inheritance Tax on all acquired assets and rights, regardless of their location.
- Application of Regional Regulations: Tax residents may benefit from reductions, deductions, and allowances established by the Autonomous Community where the deceased resided.
- Progressivity: Depending on the Autonomous Community, the tax rate is usually progressive, increasing as the taxable base grows.
- Pre-existing Wealth Consideration: Multiplicative coefficients apply based on the heir’s pre-existing wealth and degree of kinship with the deceased.
2.3. Characteristics of Real Obligation
Real obligation applies to non-tax residents in Spain. After the mentioned legal changes, its main characteristics are:
- Territorial Limitation: Non-residents only pay tax on assets and rights located, exercisable, or enforceable in Spain.
- Application of Regional Regulations: Following court rulings and legislative changes, non-residents can apply the tax regulations of the relevant Autonomous Community, which is where the highest value of inherited assets is located.
- Equal Treatment: There is no longer discrimination between residents and non-residents regarding the application of regional tax benefits.
- Tax Representation: Non-residents must appoint a tax representative in Spain to handle their tax affairs with the Spanish Tax Administration. This is a mandatory requirement.
3. Taxable Base Calculation for Non-Residents
3.1. Assets and Rights Located in Spain
For non-residents, the taxable base of Inheritance Tax is calculated only considering assets and rights located in Spain, including:
- Real estate: Any property located in Spanish territory.
- Movable assets: Those physically located in Spain at the time of death.
- Real rights: Over real estate located in Spain.
- Shares and equity interests: In companies whose assets are mainly based in Spain.
- Bank accounts: Balances in Spanish financial institutions.
3.2. Valuation of Real Estate
The valuation of real estate is crucial to avoid future issues with the Spanish Tax Administration. The main criteria are:
- Real Market Value: Real estate is valued at its market value on the date of the tax liability.
- Administrative Verification: The Tax Administration may check the declared value using market prices, cadastral value, or reference value.
- Deductions for Liabilities and Charges: Valid liabilities that reduce the real estate value can be deducted.
4. Special Considerations for Non-Residents
4.1. Applicable Regulations
Following legal reforms, non-residents can apply regional regulations under the same conditions as residents, meaning:
- Application of Regional Rules: The regulations of the Autonomous Community where the highest value of inherited assets is located will apply.
- Equal Treatment: No discrimination exists between residents and non-residents regarding tax benefits.
- State Competency: The Spanish central administration (not Autonomous Communities) manages and collects the tax.
4.2. Deductions and Allowances
Non-residents can now benefit from the same deductions and allowances as residents, including:
- Reductions based on kinship: Reductions vary depending on the degree of kinship with the deceased, following regional regulations.
- Reduction for Disability: Heirs with disabilities can apply for additional reductions.
- Reduction for Family Business Inheritance: Under certain conditions, reductions apply to inherited family businesses or company shares.
- Reduction for Main Residence Inheritance: A reduction applies to the inherited main residence of the deceased.
5. Conclusion
The legal evolution of Inheritance Tax for non-residents has significantly advanced towards equality and non-discrimination. Non-resident heirs, whether from EU/EEA countries or third countries, can now enjoy the same tax benefits as residents, applying the relevant regional regulations. This change has not only eliminated unfair discrimination but has also simplified international inheritance planning.
However, the complexity of the Spanish tax system, with its regional variations, makes it advisable to seek specialized tax advice to optimize tax liability in these cases.
Furthermore, Spanish law requires that non-resident heirs appoint a tax representative in Spain to handle all documentation, submission, and compliance to avoid penalties and asset seizures.
Our firm has over 40 years of experience handling these procedures, including the management and sale of inherited real estate when necessary.
6. Frequently Asked Questions (FAQs)
- Can non-residents from any country benefit from regional reductions in Inheritance Tax?
Yes, following the latest legal modifications, non-residents from any country can benefit from regional reductions and allowances under the same conditions as residents. - How is the applicable regional regulation determined for a non-resident?
Generally, the regulations of the Autonomous Community where the highest value of the inherited assets and rights in Spain is located will apply. - Is it necessary to appoint a tax representative in Spain to inherit as a non-resident?
Yes, non-residents must appoint a tax representative in Spain to handle their interactions with the tax authorities concerning this tax. - How does international double taxation affect inheritances for non-residents?
Double taxation may occur if the heir’s country of residence also taxes the inheritance. It is essential to check for double taxation treaties and possible deductions.