In a truly historical judgement, the Court of Justice of the European Union (CJEU) has ruled that the sanctions imposed on taxpayers by the Modelo 720 regime is illegal. The case was taken to the EU courts by the AEDAF, the Spanish tax association of which we are members.
An M720 tax declaration has been required since 2012 when a resident person has assets located outside of Spain worth over 50.000€. For a full description see these FAQs.
This is a massive slap in the face of the Spanish Government and tax administration, that often treats tax payers like feudal serfs. The terminology in tax law that describes taxpayers is especially telling as they are referred to as “sujetos pasivos” and “administrados”. Almost never as “contribuyentes”, which was the term that was floated in the early 2000s when more forward thinking politicians influenced the system. They are, sadly, long gone.
It would be a gross understatement to regard the Administration as anything other than authoritarian and aggressive. A recently published statistic disclosed that up to 84% of tax tribunal cases are lost by the tax office.
The sanctions regime imposed by the M720 has allowed the tax office to impose substantial fines on tax payers even in the case that a taxpayer discovered that they had made a mistake in not filing the M720. Making a voluntary and spontaneous correction to their tax filings before being required to do so by a tax inspection was subject to fines of a minimum fines of 10.000€ to 30.000€, simply because a taxpayer did not realise that they had to file this tax declaration. The M720 is informative only and no tax is paid, so these fines were imposed even in the case that the tax administration did not loose a single cent of tax.
The CJEU commented that the tax regime constitutes a disproportionate barrier to the movement of capital in the EU, contrary to the Treaty of Rome. In its judgment, the European Court states that “Spain has failed to fulfil its obligations under the principle of free movement of capital”.
The judgement goes on to say “The landmark ruling amends the Advocate General’s conclusions and considers that the Spanish tax rules impose “disproportionate” restrictions on the free movement of capital. The European Court of Justice thus overturns the substance of the M720 mechanisms of high fines.
The judgement also cancels the effect of the M720 regime on the Spanish tax prescription system. Normally, the tax office is not able to assess undeclared income after four or five years have passed. The M720 regime cancelled this prescription rule in the case of that foreign assets were involved, allowing the tax office to artificially treat the undisclosed assets as taxable income four years ago, impose income tax at the general rates of income tax that is around 50%, plus of course fines of up to 150% of the tax amount To rub more salt into the wound, interest was charged at rates far in excess of the normal market rates. People have been bankrupted by these draconian tax sanctions.
Anyone who has paid fines, or has been assessed tax on the basis of the override of prescription rules, is now entitled to demand repayment of the fines and taxes that have been extorted from them by a shameless tax administration. Taxpayers will also be able to claim interest on the tax and fines extracted from them.
One aspect of this ruling has been misreported in the press and that is whether the obligation to file the M720 remains in force. The M720 return itself is not illegal and, for the time being at least, must be filed. Spanish professionals are at the moment in the middle of preparing M720s for their clients.
Happily, the Spanish Government will not be allowed to appeal against this judgement.
After the declarations of illegality and nullity of the plus valia tax a few months ago, the declaration of illegality of the valuations system in property transfer tax regulations and the reversal of illegal exclusion of third country citizens from options in the Wealth tax and Inheritance/Gift tax regimes, this is another serious setback for the Spanish tax administration. Will they learn that they cannot continue abusing the taxpayer? Unlikely, this is a very faint hope as a cultural change is needed and it takes up to 10 years for the taxpayer to get any satisfaction.
It is likely we will continue to see such judgments from the EU, overturning Spanish tax law and disagreeing with Spanish senior court decisions that provides far too much support for the Spanish Establishment.