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Form 720: Declaration of Assets and Rights Held Abroad
Form 720 divides assets held outside Spain into three categories:1 – Bank accounts
2 – Other movable assets: shares, securities, investment funds, insurance policies, etc.
3 – Real estate
This form is mandatory for individuals who were considered tax residents in Spain during the year prior to the declaration deadline and who hold assets abroad valued at more than €50,000 in any of the categories listed above.
If Form 720 was previously submitted in earlier years and, during the 2021 tax year, any changes occurred in relation to those assets (new assets acquired, disposal or liquidation of previously declared assets, or a variation of more than €20,000 in the valuation of any of the three categories listed above), the declaration must be submitted again.
We are available to assess whether your situation falls within any of the above circumstances and, if you wish, to prepare and submit the relevant form on your behalf.
Link to contact us
If you have previously been subject to penalties, we can advise you on the options available to challenge them in light of the European ruling that declared such penalties unlawful.
How to Claim State Liability for Form 720 Penalties
ruling C‑788/19 of the Court of Justice of the European Union, dated 27 January 2022, has struck down the Form 720 regime.
All indications suggest that Spanish Tax Authority intends to refund all penalties imposed as a result of non-compliance with Form 720. However, pending the introduction of any specific procedure for this purpose, we set out below the current procedure for making an immediate claim for state liability, which is governed by Article 66 of Law 39/2015, of 1 October, on the Common Administrative Procedure of Public Authorities. This provision establishes certain formal requirements for initiating a claim that it is important to comply with.
Contact our tax specialists for any queries or updates on this matter:
Applications to claim a refund under Form 720 on grounds of state liability must include the following information:
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- Full name of the applicant and, where applicable, of their representative.
- Details of the preferred electronic means of notification or, failing that, a physical address for notification. Applicants may additionally provide an email address and/or electronic device so that the relevant Public Administration can notify them when a communication has been sent or made available.
- The facts, grounds and specific request, set out clearly and in full.
- Place and date.
- Signature of the applicant or any other means of authenticating their expressed intent.
- The administrative body, centre or unit to which the application is addressed, together with its corresponding identification code.
- A description of the harm suffered, the alleged causal link between that harm and the operation of the public service, an economic assessment of the state liability claim where possible, and the date on which the harm actually occurred. The application must be accompanied by any supporting arguments, documents and information deemed relevant, as well as a proposal of evidence specifying the means of proof the claimant intends to rely upon (Article 67 of Law 39/2015 of 1 October on the Common Administrative Procedure of Public Administrations).
The application must be submitted using the prescribed form, should one be standardised for this specific procedure. In the meantime, Form 720 refund claims can be submitted online through the single government portal via the following Central Government single-window portal link, although the procedure may also be completed directly through the Spanish Tax Authority's official website.
If you have any difficulties, you can seek advice from one of our lawyers specialising in patrimonial claims against the state and the Form 720.
How long does Spanish Tax Authority have to resolve a refund claim for Form 720 penalties:
When claiming Form 720 penalties, the rule of deemed rejection applies, meaning that if Spanish Tax Authority does not issue a decision on the Form 720 refund within 6 months, the request is considered rejected (Article 91 of Law 39/2015 of 1 October on the Common Administrative Procedure of Public Administrations).
- If an express decision is issued rejecting the Form 720 refund claim, an administrative appeal must be lodged within one month, and the administration will have three months to resolve that appeal.
- Where there is a deemed rejection or administrative silence, there is no final deadline for lodging an administrative appeal, as the administration remains obliged to issue a decision. In other words, if no express decision rejecting the Form 720 refund is issued, the claimant may lodge an administrative appeal from the moment the request is considered rejected (after 6 months).
The judicial review claim for claiming Form 720 refunds must then be lodged within two months of the act bringing the administrative process to a close, where that act is express. Where it is not, the time limit is six months from the date on which the deemed act takes effect.
Consult our litigation lawyers for guidance on how best to proceed
How long do I have to claim liability in connection with Form 720?
- There is a one-year window to bring a claim for State liability in connection with Form 720, starting from the date on which the act or event giving rise to the claim occurred or its harmful effects became apparent (in this case, in our view, the one-year period begins from the date of publication of the ruling in which to claim State liability for Form 720 penalties).
- It may happen, and we have seen this on occasion, that the authorities formally recognise a right to compensation following the annulment of an administrative act, in this case Form 720. In such circumstances, the right to bring a claim will expire one year after notification of the administrative decision or the definitive ruling annulling Form 720.
It will be necessary to examine how the limitation period is interpreted in the ruling of the Court of Justice of the European Union reproduced below, and also to take into account Article 32, paragraphs 4 and 5, of the Law on the Legal Regime of the Public Sector, given that the right to bring a claim will expire one year from the date of publication in the Official State Gazette (BOE) or the Official Journal of the European Union, as applicable, of the ruling declaring the rule unconstitutional or contrary to EU law.
Form 720 ruling C‑788/19, JUDGMENT OF THE COURT OF JUSTICE (First Chamber) of 27 January 2022
We reproduce below the European Court's ruling on Form 720 to provide a fuller understanding of the scope of Spanish State liability:
«State failure to fulfil obligations, Article 258 TFEU, Free movement of capital, Obligation to report assets or rights held in other Member States of the European Union or the European Economic Area (EEA), Failure to comply with that obligation, Limitation period, Penalties»
In Case C‑788/19,
ACTION for failure to fulfil obligations brought, pursuant to Article 258 TFEU, on 23 October 2019,
European Commission, represented initially by Ms C. Perrin, Ms N. Gossement and Ms M. Jáuregui Gómez, acting as Agents, and subsequently by Ms Perrin and Ms Gossement, acting as Agents,
applicant,
v
Kingdom of Spain, represented by Mr L. Aguilera Ruiz and Mr S. Jiménez García, acting as Agents,
defendant,
THE COURT OF JUSTICE (First Chamber),
composed of Mr L. Bay Larsen, Vice-President of the Court of Justice, acting as President of the First Chamber, and Mr J.‑C. Bonichot (Rapporteur) and Mr M. Safjan, Judges;
Advocate General: Mr H. Saugmandsgaard Øe;
Registrar: Mr A. Calot Escobar;
having regard to the written procedure;
after hearing the Opinion of the Advocate General, delivered at the public hearing on 15 July 2021;
gives the following
ruling
1 By its appeal, the European Commission asks the Court of Justice to declare that:
‑ by establishing consequences for failure to comply with the reporting obligation in respect of assets and rights held abroad, or for the late submission of "Form 720", which result in those assets being classified as "unjustified capital gains" not subject to any limitation period;
‑ by automatically imposing a proportional financial penalty of 150% applicable in cases of failure to comply with the reporting obligation in respect of assets and rights held abroad, or of late submission of "Form 720", and
‑ by applying fixed financial penalties for failure to comply with the reporting obligation in respect of assets and rights held abroad, or for late submission of "Form 720", that are more severe than the sanctions provided for under the general penalty regime for similar infringements,
the Kingdom of Spain has failed to fulfil its obligations by virtue of Articles 21 TFEU, 45 TFEU, 49 TFEU, 56 TFEU and 63 TFEU, and Articles 28, 31, 36 and 40 of the Agreement on the European Economic Area of 2 May 1992 (OJ 1994, L 1, p. 3; hereinafter "the EEA Agreement").
Legal framework
2 pursuant to the eighteenth additional provision of Law 58/2003 of 17 December, the General Tax Act, as amended by Law 7/2012 (hereinafter "the LGT"):
"1. Taxpayers shall provide the Tax Authority, in accordance with Articles 29 and 93 of this Act and under the terms established by regulation, with the following information:
a) Information on accounts held abroad at banking or credit institutions of which they are holders or beneficiaries, or in respect of which they appear as authorised signatories or otherwise hold powers of disposal.
b) Information on any securities, assets, instruments or rights representing the share capital, equity or net assets of any type of entity, or the transfer of own capital to third parties, of which they are holders and which are deposited or located abroad, as well as life or disability insurance policies of which they are policyholders, and life or temporary annuities of which they are beneficiaries as a result of the transfer of a sum of money, movable property or immovable property, taken out with entities established abroad.
c) Information on real estate and rights over real estate owned abroad.
[…]
2. Infringement and penalty regime.
Failure to file the informational returns referred to in this additional provision within the required time limit, or filing them in an incomplete, inaccurate or false manner, constitutes a tax infringement.
It shall also constitute a tax infringement to submit such returns by means other than electronic, computer-based or telematic methods where there is an obligation to do so by those means.
The above infringements shall be classified as very serious and shall be subject to penalties in accordance with the following rules:
a) In the event of failure to comply with the obligation to report accounts held at credit institutions abroad, the penalty shall consist of a fixed financial fine of €5,000 for each item or set of items of data relating to the same account that should have been included in the return or that were provided in an incomplete, inaccurate or false manner, with a minimum penalty of €10,000.
The penalty shall be €100 for each item or set of items of data relating to the same account, with a minimum of €1,500, where the return has been filed late without a prior request from the Tax Authority. The same penalty shall apply where the return is submitted by means other than electronic, computer-based or telematic methods when there is an obligation to use those means.
b) In the event of failure to comply with the obligation to report securities, assets, equities, rights, insurance policies and income deposited, managed or obtained abroad, the penalty shall consist of a fixed financial fine of €5,000 for each item or set of items of data relating to each asset element individually considered by category, that should have been included in the return or that were provided in an incomplete, inaccurate or false manner, with a minimum penalty of €10,000.
The penalty shall be €100 per item or set of data relating to each individual asset, considered by category, with a minimum of €1,500, where the return has been submitted late without a prior request from the Spanish Tax Authority. The same penalty shall apply where the return is submitted by means other than electronic, computer-based or telematic means, where there is an obligation to use such means.
c) In the event of failure to comply with the obligation to report real estate and rights over real estate located abroad, the penalty shall consist of a fixed financial fine of €5,000 per item or set of data relating to the same property or the same right over a property that should have been included in the return or that was submitted in an incomplete, inaccurate or false manner, with a minimum of €10,000.
The penalty shall be €100 per item or set of data relating to the same property or the same right over a property, with a minimum of €1,500, where the return has been submitted late without a prior request from the Spanish Tax Authority. The same penalty shall apply where the return is submitted by means other than electronic, computer-based or telematic means, where there is an obligation to use such means.
The infringements and penalties governed by this additional provision shall be incompatible with those set out in Articles 198 and 199 of this Act.
3. The legislation governing each individual tax may establish specific consequences for failure to comply with the reporting obligation set out in this additional provision.»
3 Article 39 of Law 35/2006 of 28 November on Personal Income Tax and the partial amendment of the legislation on Corporate Income Tax, Non-Resident Income Tax and Wealth Tax, as amended by Law 7/2012 (hereinafter, "LIRPF"), entitled "Unjustified capital gains", provides as follows:
«1. Assets or rights whose possession, declaration or acquisition is inconsistent with the income or assets declared by the taxpayer shall be treated as unjustified capital gains, as shall the inclusion of non-existent debts in any return filed under this tax or under Wealth Tax, or their entry in official books or registers.
Unjustified capital gains shall be included in the general taxable base for the tax period in which they are discovered, unless the taxpayer provides sufficient evidence that they have held the relevant assets or rights since a date prior to the start of the limitation period.
2. In all cases, the possession, declaration or acquisition of assets or rights in respect of which the reporting obligation referred to in the eighteenth additional provision of the [LGT] has not been fulfilled within the prescribed time limit shall be treated as unjustified capital gains and shall be included in the general taxable base for the earliest tax period among those not yet time-barred that is open to regularisation.
However, the provisions of this paragraph shall not apply where the taxpayer demonstrates that ownership of the assets or rights corresponds to income that has been declared, or to income obtained in tax periods during which the taxpayer did not have the status of taxpayer under this tax.»
4 Article 121 of Law 27/2014 of 27 November on Corporate Income Tax (hereinafter, "LIS"), entitled "Assets and rights not recorded in accounting books or not declared: presumption of income obtained", provides:
«1. Assets owned by the taxpayer that are not recorded in its accounting books shall be presumed to have been acquired from undeclared income.
This presumption shall likewise apply in cases of partial concealment of the acquisition value.
2. Assets not recorded in the accounting books shall be presumed to belong to the taxpayer where the taxpayer is in possession of them.
3. The amount of undeclared income shall be presumed to be the acquisition value of assets or rights not recorded in the accounting books, reduced by the amount of any actual debts incurred to finance such acquisition that are likewise unrecorded. In no case may the net amount be negative.
The acquisition value shall be evidenced by the relevant supporting documents, or, where that is not possible, by applying the valuation rules set out in the [LGT].
4. The existence of undeclared income shall be presumed where non-existent debts have been recorded in the taxpayer's accounting books.
5. The amount of income arising from the presumptions set out in the preceding paragraphs shall be attributed to the earliest tax period among those not yet time-barred, unless the taxpayer demonstrates that it corresponds to a different period or periods.
6. In all cases, assets and rights in respect of which the taxpayer has failed to comply within the prescribed time limit with the reporting obligation referred to in the Eighteenth Additional Provision of the [LGT] shall be deemed to have been acquired from undeclared income, which shall be attributed to the earliest tax period among those not yet time-barred that is open to regularisation.
However, the provisions of this paragraph shall not apply where the taxpayer can demonstrate that the assets and rights of which they are the owner were acquired from declared income or from income obtained in tax periods during which they did not have the status of taxpayer for the purposes of this Tax.
[…]»
5 The first additional provision of Law 7/2012, entitled "Penalty regime in cases of unjustified capital gains and presumed receipt of income", reads as follows:
«The application of the provisions of Article 39.2 of the [Personal Income Tax Act] and Article 134.6 of the consolidated text of the Corporate Income Tax Act, approved by Royal Legislative Decree 4/2004 of 5 March [, the provisions of which were subsequently reproduced in Article 121(6) of the Corporate Income Tax Act], shall constitute a tax infringement, which shall be classified as very serious and shall be penalised with a proportional financial penalty of 150 per cent of the penalty base.
The penalty base shall be the amount of the full tax liability resulting from the application of the articles referred to in the preceding paragraph. […]»
Prior administrative procedure
6 By letter of formal notice dated 20 November 2015, the Commission drew the attention of the Spanish authorities to the incompatibility with EU law of certain aspects of the obligation to declare assets or rights held abroad by means of the 'Form 720'. In the Commission's view, the consequences attached to non-compliance with that obligation were disproportionate in relation to the objective pursued by the Spanish legislation.
7 Following the response submitted by the Kingdom of Spain on 29 February 2016, in which that Member State denied the existence of any incompatibility with EU law, the Commission issued, on 15 February 2017, a reasoned opinion in which it maintained the position set out in its letter of formal notice.
8 By letters of 12 April 2017 and 31 May 2019, the Kingdom of Spain replied to that reasoned opinion. It argued, in essence, relying on certain practical examples, that the legislation at issue was compatible with EU law.
9 Finding Spain's submissions unsatisfactory, the Commission brought the present appeal on 23 October 2019 under Article 258 TFEU.
The appeal
The freedoms at issue
10 By its appeal, the Commission submits that the Kingdom of Spain has failed to fulfil its obligations under Articles 21, 45, 49, 56 and 63 TFEU and Articles 28, 31, 36 and 40 of the EEA Agreement, by reason of the consequences which its legislation attaches to failure to declare, or to incomplete or late declaration of, assets or rights held abroad using the so-called "Form 720".
11 It should be recalled that, where a national measure relates to more than one of the fundamental freedoms guaranteed by the Treaties, the Court will, in principle, examine it in the light of only one of those freedoms if it appears that, having regard to the purpose of the measure in question, the others are entirely secondary to it and may be considered together with it (see, to that effect, regarding a measure relating both to the free movement of capital and to freedom of establishment, the judgments of 13 November 2012, Test Claimants in the FII Group Litigation, C‑35/11, EU:C:2012:707, paragraphs 89 to 93, and of 28 February 2013, Beker and Beker, C‑168/11, EU:C:2013:117, paragraphs 25 to 31; and, regarding a measure relating both to the free movement of capital and to the freedom to provide services, the ruling of 26 May 2016, NN (L) International, C‑48/15, EU:C:2015:356, paragraph 39).
12 Under the national legislation at issue in the present case, residents in Spain who fail to declare, or declare incompletely or late, assets and rights held abroad are exposed to a tax adjustment in respect of the amounts corresponding to the value of those assets or rights, even where they were acquired during a period already covered by the limitation period, as well as to a proportional penalty and specific fixed-amount penalties.
13 That legislation, which is aimed, in general terms, at the holding of assets or rights abroad by persons resident in Spain, without such holding necessarily taking the form of a shareholding in the capital of entities established abroad or being primarily motivated by a wish to obtain financial services abroad, falls within the scope of the free movement of capital. Although it may also affect the freedom to provide services and the freedom of establishment, those freedoms are nonetheless secondary to the free movement of capital and may be subordinated to it. The same applies, in any event, with regard to the free movement of workers.
14 Furthermore, it should be noted that the Commission has not provided sufficient information to enable the Court of Justice to assess in what way the national legislation at issue affects the free movement of Union citizens or the free movement of workers, as guaranteed by Articles 21 TFEU and 45 TFEU.
15 It follows from the foregoing considerations that the complaints raised by the Commission must be examined in the light of the free movement of capital guaranteed by Article 63 TFEU and Article 40 of the EEA Agreement, the legal scope of which is substantially identical (see, to that effect, the judgments of 11 June 2009, Commission v Netherlands, C‑521/07, EU:C:2009:360, paragraph 33, and of 5 May 2011, Commission v Portugal, C‑267/09, EU:C:2011:273, paragraph 51).
Whether there is a restriction on the movement of capital
Arguments of the parties
16 According to the Commission, the legislation at issue, which has no equivalent with regard to assets or rights held by taxpayers within national territory, constitutes a restriction on the free movement of capital, in so far as it has the effect of discouraging persons resident in Spain from transferring their assets abroad. The Commission submits that, as the Court of Justice already acknowledged in its ruling of 11 June 2009, X and Passenheim-van Schoot (C‑155/08 and C‑157/08, EU:C:2009:368), paragraphs 36 to 40, there is no objective difference in situation between taxpayers resident in Spain depending on whether their assets are located within Spanish territory or outside it.
17 For its part, the Kingdom of Spain argues that persons who conceal their assets for tax purposes cannot rely on the free movement of capital. It further contends that the penalties linked to non-compliance with the reporting obligation cannot be regarded as restrictions on that freedom, since they are indispensable to ensure the effectiveness of the obligation. In any event, in its view, having regard to the possibilities of tax supervision, taxpayers whose assets are located in Spanish territory are not in the same situation as those whose assets are located abroad.
Assessment of the Court of Justice
18 According to settled case-law of the Court of Justice, measures imposed by a Member State that are liable to deter investors in that State from making investments in other States, or that prevent or limit their ability to do so, constitute, in particular, restrictions on the movement of capital within the meaning of Article 63(1) TFEU [see, to that effect, the judgments of 26 September 2000, Commission v Belgium, C‑478/98, EU:C:2000:497, paragraph 18; of 23 October 2007, Commission v Germany, C‑112/05, EU:C:2007:623, paragraph 19; and of 26 May 2016, NN (L) International, C‑48/15, EU:C:2016:356, paragraph 44].
19 In the present case, the obligation to declare assets or rights held abroad by means of the 'Modelo 720' form, and the penalties linked to non-compliance with, or incomplete or late fulfilment of, that obligation, which have no equivalent with respect to assets or rights located in Spain, introduce a difference in treatment between Spanish residents depending on where their assets are situated. That obligation is liable to deter residents of that Member State from investing in other Member States, to prevent them from doing so or to limit their ability to do so, and therefore constitutes, as the Court of Justice has already held in relation to legislation aimed at ensuring the effectiveness of tax supervision and combating tax fraud arising from the concealment of assets abroad, a restriction on the free movement of capital within the meaning of Article 63(1) TFEU and Article 40 of the EEA Agreement (see, to that effect, the ruling of 11 June 2009, X and Passenheim-van Schoot, C‑155/08 and C‑157/08, EU:C:2009:368, paragraphs 36 to 40).
20 The fact that this legislation is directed at taxpayers who conceal their assets for tax purposes does not undermine this conclusion. Indeed, the fact that a measure aims to ensure the effectiveness of tax controls and to combat tax fraud does not preclude a finding that a restriction on the movement of capital exists. Those objectives are merely among the overriding reasons in the public interest that may justify the establishment of such a restriction (see, to that effect, judgments of 11 June 2009, X and Passenheim-van Schoot, C‑155/08 and C‑157/08, EU:C:2009:368, paragraphs 45 and 46, and of 15 September 2011, Halley, C‑132/10, EU:C:2011:586, paragraph 30).
On the justification for the restriction on the free movement of capital
Arguments of the parties
21 Should the legislation at issue be regarded as a restriction on the movement of capital, the Commission and the Kingdom of Spain agree that it could be justified by the need to ensure the effectiveness of tax controls and by the objective of combating tax fraud and tax evasion. However, the Commission maintains that the legislation goes beyond what is necessary to achieve those objectives.
Assessment of the Court of Justice
22 As noted in paragraph 20 of this ruling, the need to ensure the effectiveness of tax controls and the objective of combating tax fraud and tax evasion are among the overriding reasons in the public interest that may justify the establishment of a restriction on the freedoms of movement (see, to that effect, judgments of 11 June 2009, X and Passenheim-van Schoot, C‑155/08 and C‑157/08, EU:C:2009:368, paragraphs 45 and 46, and of 15 September 2011, Halley, C‑132/10, EU:C:2011:586, paragraph 30).
23 With regard to the movement of capital, Article 65(1)(b) TFEU further provides that Article 63 TFEU shall be without prejudice to the right of Member States to take all requisite measures to prevent infringements of their national laws and regulations, in particular in the field of taxation.
24 In the present case, since the information available to the national authorities regarding assets held abroad by their tax residents is, overall, less than that available to them regarding assets located within their territory, even taking into account the existence of information-exchange mechanisms and administrative cooperation arrangements between Member States, the legislation at issue is appropriate for ensuring the attainment of the objectives pursued. It must, however, be examined whether it goes beyond what is necessary to achieve those objectives.
On the proportionality of classifying assets held abroad as "unjustified capital gains", with no possibility of invoking the limitation period
Arguments of the parties
25 According to the Commission, failure to comply with the reporting obligation, or the submission of an incomplete or late "Form 720", gives rise to disproportionate consequences in relation to the objectives pursued by the Spanish legislature, in that it triggers an irrebuttable presumption (iuris et de iure) that undeclared income has been obtained, equal to the value of the assets or rights in question, resulting in the corresponding amounts being assessed against the taxpayer, who can neither rely on limitation rules nor avoid the assessment by demonstrating that the tax due on those assets or rights was settled in the past.
26 The Kingdom of Spain denies the existence of an irrebuttable presumption (iuris et de iure) of tax fraud. It argues that the concealment of the assets or rights in question and the taxpayer's failure to pay the corresponding tax must be proven before the non-filing or late filing of a declaration of those assets or rights via the "Modelo 720" form can give rise to a presumption that the taxpayer has obtained undeclared income. The Kingdom of Spain likewise denies that limitation rules are entirely absent. It submits that Spanish law merely provides for a specific rule regarding the starting point of the limitation period, which, under the principle of actio nata, does not begin to run until the date on which the tax authority becomes aware of the existence of the assets or rights in respect of which the reporting obligation has not been met, or has been met improperly or out of time.
Assessment of the Court of Justice
27 According to settled case-law of the Court of Justice, the mere fact that a resident taxpayer holds assets or rights outside the territory of a Member State cannot support a general presumption of tax fraud and evasion (see, to that effect, judgments of 11 March 2004, de Lasteyrie du Saillant, C‑9/02, EU:C:2004:138, paragraph 51, and of 7 November 2013, K, C‑322/11, EU:C:2013:716, paragraph 60).
28 Furthermore, legislation that presumes the existence of fraudulent conduct solely on the ground that the conditions it lays down are met, without affording the taxpayer any opportunity to rebut that presumption, goes, in principle, beyond what is necessary to achieve the objective of combating tax fraud and evasion (see, to that effect, judgments of 3 October 2013, Itelcar, C‑282/12, EU:C:2013:629, paragraph 37 and the case-law cited, and of 26 February 2019, X (Intermediate companies established in third countries), C‑135/17, EU:C:2019:136, paragraph 88).
29 It follows from Article 39(2) of the LIRPF and Article 121(6) of the LIS that a taxpayer who has failed to comply with the reporting obligation, or who has done so incompletely or out of time, may avoid having the amounts corresponding to the value of their undeclared overseas assets or rights, which were not reported via the "Form 720", included in the taxable base of the tax due for the earliest non-time-barred tax period as unjustified capital gains, provided they can produce evidence that those assets or rights were acquired using declared income or income obtained in tax periods during which they did not have the status of taxpayer for that tax.
30 Furthermore, the Kingdom of Spain argues, without effective rebuttal by the Commission, that a taxpayer's failure to retain evidence of having previously paid tax on the amounts used to acquire the assets or rights not declared via "Form 720" does not automatically result in those amounts being included as unjustified capital gains in the taxpayer's taxable base. Indeed, that Member State notes that, by virtue of the general rules on the burden of proof, it falls in all cases to the tax authorities to demonstrate that the taxpayer has failed to fulfil their tax payment obligation.
31 It follows from the foregoing that, on the one hand, the presumption of unjustified capital gains established by the Spanish legislature is not based solely on the taxpayer's possession of assets or rights abroad, since that presumption is triggered by the taxpayer's failure to comply, or late compliance, with the specific reporting obligations applicable to those assets or rights. On the other hand, according to the information provided to the Court of Justice, the taxpayer may rebut this presumption not only by demonstrating that the assets or rights in question were acquired using declared income or income obtained in tax periods during which they did not have the status of taxpayer, but also, where they are unable to establish that, by arguing that they did fulfil their obligation to pay tax on the income used to acquire those assets or rights, which it then falls to the tax authorities to verify.
32 In these circumstances, the presumption established by the Spanish legislature is not disproportionate in relation to the objectives of ensuring the effectiveness of tax controls and combating tax fraud and evasion.
33 The fact that a taxpayer cannot rebut this presumption by arguing that the assets or rights in respect of which they failed to comply with the reporting obligation, or did so imperfectly or out of time, were acquired during a period that is now time-barred does not undermine this conclusion. Indeed, invoking a limitation rule does not serve to rebut a presumption of tax fraud or evasion; it merely allows the taxpayer to avoid the consequences that would otherwise follow from the application of that presumption.
34 Nevertheless, it is necessary to examine whether the choices made by the Spanish legislature regarding limitation periods are not, in themselves, disproportionate in relation to the objectives pursued.
35 In this regard, it should be noted that Articles 39(2) of the Personal Income Tax Act (LIRPF) and 121(6) of the Corporate Income Tax Act (LIS) effectively allow the tax authorities to regularise, without any time limit, the tax due on amounts corresponding to the value of assets or rights held abroad that were not declared, or were declared imperfectly or out of time, via the "Modelo 720" reporting form. This holds true even if the Spanish legislature is considered to have intended only to delay, by applying the actio nata rule, the starting point of the limitation period and to fix it at the date on which the tax authorities first become aware of the existence of the assets or rights held abroad. In practice, this approach amounts to allowing the tax authorities to tax, for an indefinite period, income corresponding to the value of those assets, without regard to the tax year or period in respect of which the corresponding tax on that income would ordinarily have been due.
36 Furthermore, it follows from Article 39(2) of the LIRPF and Article 121(6) of the LIS that failure to comply with the reporting obligation, or compliance outside the prescribed time limits, results in the inclusion in the taxable base of amounts corresponding to the value of undeclared assets or rights held abroad, even where those assets or rights entered the taxpayer's estate during a tax year that had already become statute-barred at the time the reporting obligation fell due. By contrast, a taxpayer who has complied with that obligation within the prescribed time limits retains the benefit of the limitation period in respect of any undisclosed income that may have been used to acquire the assets or rights held abroad.
37 It follows from the foregoing not only that the rules adopted by the Spanish legislature produce an effect of indefinite imputability, but also that they enable the tax authorities to call into question a limitation period that has already expired in the taxpayer's favour.
38 Whilst the national legislature may provide for an extended limitation period in order to ensure the effectiveness of tax controls and to combat fraud and tax evasion arising from the concealment of assets abroad, provided that the duration of that period does not go beyond what is necessary to achieve those objectives, having regard in particular to the mechanisms for the exchange of information and administrative cooperation between Member States (see the ruling of 11 June 2009, X and Passenheim-van Schoot, C‑155/08 and C‑157/08, EU:C:2009:368, paragraphs 66, 72 and 73), the same does not hold true for the introduction of mechanisms that, in practice, amount to extending indefinitely the period during which taxation may be imposed, or that allow a limitation period that has already expired to be set aside.
39 Indeed, the fundamental requirement of legal certainty is, in principle, incompatible with public authorities having an unlimited power to act in order to bring an unlawful situation to an end (see, by analogy, the ruling of 14 July 1972, Geigy/Commission, 52/69, EU:C:1972:73, paragraph 21).
40 In the present case, as noted in paragraphs 35 and 36 of this ruling, the possibility for the tax authority to act without any time limit, and even to call into question a limitation period that has already expired, arises solely from the taxpayer's failure to comply with the formal requirement of declaring, within the prescribed time limits, assets or rights held abroad.
41 By attaching consequences of such severity to the failure to comply with this reporting obligation, the approach chosen by the Spanish legislature goes beyond what is necessary to ensure the effectiveness of tax controls and to combat tax fraud and tax evasion, without there being any need to consider what conclusions should be drawn from the existence of information exchange mechanisms or administrative cooperation arrangements between Member States.
On the proportionality of the 150% penalty
Arguments of the parties
42 The Commission submits that, by imposing a proportional penalty of 150% of the tax calculated on the amounts corresponding to the value of assets or rights held abroad, a penalty that is both automatic and non-adjustable, as a sanction for failure to comply or for late compliance with the reporting obligation, the Spanish legislature established a disproportionate restriction on the free movement of capital.
43 The Commission argues, in particular, that the rate of this penalty is substantially higher than the progressive rates applicable to late reporting of taxable income in a purely domestic situation, which range, depending on the length of the delay, from 5%, 10%, 15% or 20% of the tax owed by the taxpayer. This is all the more striking given that, unlike the domestic late-reporting surcharge, which is linked to a failure to meet a tax payment obligation, the 150% penalty merely sanctions the failure to comply with a formal disclosure obligation which, as a general rule, does not entail any additional tax liability.
44 The Commission also clarifies that, in its view, no account can be taken of the penalty reduction options referred to in a binding tax ruling of 6 June 2017, since that ruling does not have the force of law and postdates the reasoned opinion. It further emphasises that, in the absence of any investigation by the tax authorities, taxpayers who are unable to demonstrate that their overseas assets or rights were acquired from income that was declared and taxed would automatically be subject to the 150% penalty, which again amounts to establishing an irrebuttable presumption (iuris et de iure) of tax fraud, and that no account whatsoever is taken of the overall tax burden imposed on the taxpayer as a result of the combined effect of the 150% proportional penalty and the fixed-amount penalties provided for under the eighteenth additional provision of the General Tax Act (LGT).
45 The Kingdom of Spain, for its part, takes the view that assessing the proportionality of penalties falls exclusively within the remit of the national authorities, since this matter has not been harmonised at European level. That said, it argues that the 150% penalty is designed to sanction the failure to comply with a disclosure obligation where no regularisation of the corresponding tax has taken place, in other words, acts of tax evasion, and therefore cannot be compared with the surcharges applied in cases of late filing, which are intended solely to incentivise taxpayers to meet the prescribed deadlines.
46 The Kingdom of Spain further submits that account should be taken of the options for graduated penalties provided for in the binding tax ruling of 6 June 2017, the content of which was incorporated into the law with retroactive effect, as well as the general power to graduate penalties conferred on the Administration under national law, pursuant to the principle of proportionality.
47 Finally, that Member State denies that the 150% penalty is automatic in nature, arguing that it may only be imposed where the constituent elements of the infringement it sanctions are present, that the burden of proving the taxpayer's culpability always lies with the Administration, and that, in practice, the penalty is not imposed systematically. It further notes that, given the characteristics of the 150% penalty, its proportionality must be assessed by reference to the penalties imposed in the most serious cases of non-payment of a tax debt, which, in the event of a criminal offence against the Spanish Tax Authority, could reach up to 600% of the amount of tax owed by the taxpayer.
Assessment of the Court of Justice
48 As a preliminary point, it should be recalled that, whilst it is for Member States, in the absence of harmonisation under EU law, to choose the penalties they consider appropriate in cases of non-compliance with obligations laid down by their national legislation in the field of direct taxation, they are nonetheless required to exercise that competence in compliance with EU law and its general principles and, consequently, in compliance with the principle of proportionality (see, to that effect, the ruling of 12 July 2001, Louloudakis, C‑262/99, EU:C:2001:407, paragraph 67 and the case-law cited).
49 As regards the proportionality of the 150% penalty, it is apparent from the first additional provision of Law 7/2012 that the application of the provisions of Article 39(2) of the Personal Income Tax Act or Article 134(6) of the consolidated text of the Corporate Income Tax Act, approved by Royal Legislative Decree 4/2004 of 5 March, whose provisions were subsequently reproduced in Article 121(6) of the Corporate Income Tax Act, entails the imposition of a penalty of 150% of the total amount of tax owed in respect of the sums corresponding to the value of assets or rights held abroad. This penalty is cumulative with the fixed-amount penalties provided for in the eighteenth additional provision of the General Tax Act, which apply to each item or set of items of information omitted, incomplete, inaccurate or false that must be included in the "Form 720".
50 Although the Kingdom of Spain argues that this proportional fine penalises a failure to comply with a substantive tax payment obligation, it is beyond question that its imposition is directly linked to a failure to comply with disclosure obligations. Indeed, it applies only to taxpayers whose situation falls within the scope of Article 39(2) of the LIRPF or Article 121(6) of the LIS, that is, taxpayers who have failed to comply with the obligation to report assets or rights held abroad, or who have done so incompletely or out of time, while excluding those who, despite having acquired such assets or rights using undeclared income, did nevertheless comply with that obligation.
51 Furthermore, whilst the Kingdom of Spain contends that, in practice, the imposition of the 150% proportional fine results from a case-by-case assessment and that the rate may be reduced, the wording of the First Additional Provision of Law 7/2012 indicates that the mere application of Article 39(2) of the LIRPF or Article 121(6) of the LIS is sufficient to establish the existence of a tax infringement, which is classified as very serious and penalised by the imposition of a fine of 150% of the amount of tax evaded, a percentage that is not framed as a maximum rate.
52 In this regard, it should be noted that the possibilities for graduated reduction of the penalty offered by a binding tax ruling of 6 June 2017, issued after the reasoned opinion addressed by the Commission to the Kingdom of Spain on 15 February 2017, cannot be taken into account in the context of the present appeal, since, according to settled case-law, the existence of a failure to fulfil obligations must be assessed by reference to the situation of the Member State as it stood at the end of the period prescribed in the reasoned opinion (see, to that effect, the ruling of 22 January 2020, Commission v Italy (Late Payment Directive), C‑122/18, EU:C:2020:41, paragraph 58). The fact that the interpretation contained in that binding tax ruling was incorporated retrospectively into the legislation is irrelevant for these purposes.
53 Finally, it should be highlighted that the proportional penalty is set at an extremely high rate, giving it a markedly punitive character. In many cases, when combined with the fixed-amount penalties also provided for under the eighteenth additional provision of the General Taxation Act (LGT), this can result in the total amount owed by the taxpayer as a consequence of failing to comply with the obligation to report assets or rights held abroad exceeding 100% of the value of those assets or rights, as the Commission underlines.
54 In these circumstances, the Commission has demonstrated that, by imposing a proportional penalty of 150% of the tax calculated on the amounts corresponding to the value of assets or rights held abroad as a sanction for a taxpayer's failure to comply with their disclosure obligations in respect of such assets or rights, a penalty that may be combined with fixed-amount fines, the Spanish legislature has placed a disproportionate restriction on the free movement of capital.
On the proportionality of the fixed-amount penalties
Arguments of the parties
55 Finally, the Commission submits that imposing fixed-amount penalties for failure to comply, or for incomplete or late compliance, with the obligation to report assets or rights held abroad constitutes a disproportionate restriction on the free movement of capital, where those penalties are higher than those applicable to similar infringements in a purely domestic context and take no account of any information that the tax authorities may already hold regarding those assets.
56 In any event, the Commission takes the view that the fact that failure to comply, or incomplete or late compliance, with the reporting obligation, which is a purely formal requirement whose non-observance causes no direct financial harm to the Spanish Tax Authority, results in penalties that are, depending on the case, 15, 50 or 66 times higher than those applicable to similar infringements in a purely domestic context under Articles 198 and 199 of the LGT, is sufficient in itself to demonstrate the disproportionate nature of those penalties.
57 While acknowledging that the flat-rate fines provided for in the eighteenth additional provision of the LGT penalise the breach of a formal obligation whose non-compliance causes no direct financial harm to the Public Spanish Tax Authority, the Kingdom of Spain takes the view that the comparators relied upon by the Commission are not relevant. In its submission, the fixed-amount fines imposed for failure to comply with, or late compliance with, the reporting obligation should instead be compared with those imposed for failure to comply with the "related-party transactions declaration" provided for under Spanish law, since that declaration is likewise structured as a reporting obligation concerning monetary data that must be fulfilled by the taxpayer to whom the information relates. Furthermore, the Member State argues that the information available to the tax authorities regarding assets held by a taxpayer abroad should not be taken into account when assessing the proportionality of the fixed-amount fines, which should be examined solely by reference to the conduct of the taxpayer.
Assessment of the Court of Justice
58 Under the eighteenth additional provision of the LGT, taxpayers are required to provide the tax authorities with a range of information concerning their assets or rights held abroad, including immovable property, bank accounts, securities, assets, shares or rights representing the share capital, equity or net assets of entities of any kind, as well as life and disability insurance policies held outside Spanish territory. Where a taxpayer provides the tax authorities with incomplete, inaccurate or false data, fails to supply the required information, or does so outside the prescribed time limits or in a form other than that required, this will be classified as a "tax infringement" and will give rise to a fixed monetary fine of €5,000 for each item or set of items of data that is omitted, incomplete, inaccurate or false, with a minimum of €10,000, and a fine of €100 for each item or set of items of data declared outside the time limit or not declared by electronic, IT or telematic means where there was an obligation to do so, with a minimum of €1,500.
59 The eighteenth additional provision of the General Tax Act (LGT) also establishes that these fines may not be cumulated with those provided for under Articles 198 and 199 of that Act, which set out the general penalties applicable to taxpayers who fail to meet their reporting obligations or do so in an incomplete, untimely or non-compliant manner. Under those provisions, where there is no direct financial loss to the Spanish Tax Authority, failure to submit a return within the prescribed time limit is subject, save in particular cases, to a fixed monetary fine of €200, which is reduced by half where the taxpayer submits the return late without prior request from the tax authorities. Submission of an incomplete, inaccurate or false return is subject to a fixed monetary fine of €150, and submission of a return without observing the prescribed formal requirements is subject to a fixed monetary fine of €250.
60 It follows from the foregoing that the eighteenth additional provision of the General Tax Act (LGT) penalises the breach of purely declaratory or formal obligations arising from a taxpayer's ownership of assets or rights abroad by imposing fixed-amount fines of a very substantial size: they apply to each piece of data or group of data, are accompanied, depending on the case, by a minimum amount of €1,500 or €10,000, and are subject to no overall cap. These fixed monetary fines are, moreover, cumulated with the proportional fine of 150% provided for under the first additional provision of Law 7/2012.
61 It further follows from the foregoing that the amount of these fixed monetary fines bears no proportion whatsoever to the amounts of those imposed on taxpayers by virtue of Articles 198 and 199 of the General Tax Act (LGT), which are comparable in that they penalise the breach of obligations analogous to those provided for under the eighteenth additional provision of that Act.
62 These characteristics are sufficient to demonstrate that the fixed pecuniary penalties provided for by that provision establish a disproportionate restriction on the free movement of capital.
63 In light of all the foregoing considerations, it must be declared that the Kingdom of Spain has failed to fulfil its obligations under by virtue of Articles 63 TFEU and 40 of the EEA Agreement:
‑ by providing that failure to comply, or late or incomplete compliance, with the reporting obligation in respect of assets and rights held abroad results in the undeclared income corresponding to the value of those assets being treated as unjustified capital gains, with no practical possibility of relying on a limitation period;
‑ by penalising failure to comply, or late or incomplete compliance, with the reporting obligation in respect of assets and rights held abroad with a proportional fine of 150% of the tax calculated on the amounts corresponding to the value of those assets or rights, which may be cumulated with fixed-amount penalties; and
‑ by penalising failure to comply, or late or incomplete compliance, with the reporting obligation in respect of assets and rights held abroad with fixed-amount fines whose level bears no proportionate relationship to the penalties applicable to similar infringements in a purely domestic context and whose total amount is not capped.
Costs
64 Under Article 138(1) of the Rules of Procedure of the Court of Justice, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the other party's submissions. Since the Commission has applied for costs against the Kingdom of Spain and the failure to fulfil obligations has been established, Spain must be ordered to pay the costs.
by virtue of all of the foregoing, the Court of Justice (First Chamber) rules:
1) That the Kingdom of Spain has failed to fulfil its obligations under Articles 63 TFEU and 40 of the Agreement on the European Economic Area of 2 May 1992:
– by providing that failure to comply, or incomplete or late compliance, with the reporting obligation in respect of assets and rights located abroad results in the undeclared income corresponding to the value of those assets being treated as "unjustified capital gains", with no possibility in practice of invoking the limitation period;
– by penalising failure to comply, or incomplete or late compliance, with the reporting obligation in respect of assets and rights located abroad with a proportional fine of 150% of the tax calculated on the amounts corresponding to the value of those assets or rights, which may be combined with flat-rate fines; and
– by penalising failure to comply, or incomplete or late compliance, with the reporting obligation in respect of assets and rights located abroad with flat-rate fines bearing no proportion to the penalties applicable to similar infringements in a purely domestic context and with no cap on the total amount.
2) That the Kingdom of Spain is ordered to pay the costs.
Delivered in open court in Luxembourg on 27 January 2022.
