TA recent ruling, December 3rd 2020, from the High Court of Justice of the Balearic (Appeal nº. 245/2019), represents a 180º turnaround from the current criteria of the Spanish General Directorate of Taxes (GDT). The GDT has repeatedly sustained the criteria that non-tax resident individuals were subject to Wealth Tax (WT), by real obligation (rights or assets located or exercisable in Spain), even if those assets were owned through a non-resident legal entity.
Which is the case?
- An individual resident in a country with whom Spain has concluded a Treaty to avoid Double Taxation (DTT) in terms of Wealth Tax1 (Germany in this case);
- The individual holds shares in a foreign entity whose assets include real estate properties located in Spain;
- More than 50% of the assets of the foreign entity consisted in real estate located in Spain.
Who is affected by Ruling nº 245/2019?
Individuals with tax residency in a foreign country holding a DTT treaty with Spain, including WT provisions, including:
- Holder of shares in a foreign entity, whose Spanish real estate represent more than 50% of its total asset value. (scenario 1),
- In our view, the criteria set by the ruling would also apply to those cases where the foreign entity (Holding), holds shares in a Spanish real estate entity (scenario 2).
Our view is that the ruling reinforces the case for the non-applicability of Spanish WT to any individuals with tax residency in a foreign country who has not signed a DTT with Spain including WT provisions. The individuals benefitting from this interpretation would be those that hold shares in a non-resident entity owning Spanish real estate directly or indirectly (i.e.: through shares in a Spanish real estate entity). The arguments below should reinforce this criterion.
What was the so far the view of the GDT?
The GDT claimed that the Spanish-German DTT conferred Spain the capacity to tax the assets of a Spanish non-resident consisting in shares in an entity owning Spanish real estate, whenever the value of those assets was at least 50% of the company asset value. For the purposes of this calculation, the GDT assimilated direct or indirect ownership (through a Spanish subsidiary) of the Spanish real estate.
And what do WT domestic regulations foresee?
This is the key element. Having the taxing power conferred by a DTT does not mean there is no need to review whether the beneficial owner must be subject to tax or not.
In this regard, WT domestic regulations determine that Spanish non-residents will be subject to tax by a real obligation, on the basis that the rights and assets owned are located in Spain.
According to the above, there are no grounds for Spain taxing ownership of shares in a non-resident entity, irrespective of the assets owned by that entity in Spain. The reason being that the rights over the shares of a foreign entity r can only be exercised in the state of residency and not in Spain.
For this reason, we may consider that the GDT had set a criterion lacking a legal basis, as it subjected to Spanish tax a non-tax resident for a taxable event that is not considered within the domestic regulations.
And what does Ruling nº 245/2019 say?
Exactly what we have highlighted above, besides the taxing power a DTT grants Spain to tax non-residents holding shares in a non-resident entity meeting the Spanish assets ownership criteria above, the WT regulations do not provide in these cases that the taxable event triggering the tax liability concurs. Consequently, non-tax residents holding rights (conferred by shares/units of a non-resident entity) that are not exercisable in Spain, would not be subject to WT.
The criteria set by Ruling nº 245/2019 openly contradicts the longstanding views held by the GDT. We should keep an eye out on any new judicial pronouncements that may be published on this important issue.
We remain at your disposal for any clarification you may need.
________
Tax Area
info.barcelona@ecija.com
+ 34 933 808 255