Global Tax ALert: The CJEU overturns Spanish Law on tax Form 720

The Court of Justice of the European Union (CJEU), has stated in its judgment in case C-788/19 of 27 January 2022  that the Spanish legislation on the tax form requiring Spanish tax residents to declare their foreign assets and rights (Form 720) is disproportionate and contrary to EU law.

Background

Form 720 was introduced in 2012 in order to report foreign assets held by Spanish residents. The consequences for taxpayers who did not comply with this reporting obligation were the following:

• The value of the undeclared assets and rights had to be assessed in the personal income tax return as "unjustified capital gains" without the possibility of relying on the statute of limitations;
• A proportional penalty amounting to 150% of the tax calculated on the amounts corresponding to the value of such assets or rights;
• Formal penalties amounting to EUR5,000 per each non-reported data item or set of data with a minimum penalty of EUR10,000. In addition, late reporting entails a EUR100 penalty of each data or set of data with a minimum penalty of EUR1,500.

In 2017 the European Commission started an infringement proceeding, based on the fact that those consequences were disproportionate, which led to the case being brought before the CJEU.

In its judgement, the CJEU has ruled that the consequences for non-compliance with Form 720 obligations could prevent Spanish taxpayers from investing abroad and, therefore, qualify as a disproportionate restriction on the free movement of capital contrary to EU law. In this regard, the CJEU rules that such restriction may be justified on the basis of public interest (ie in order to prevent tax fraud) but, in the case at hand, it goes beyond what is necessary. In a nutshell, the main deliberations of the Court are the following:

• With regards to the inapplicability of the statute of limitations, although the CJEU has expressly ruled that the presumption of obtaining “unjustified capital gains” could be justified, the Court points out that Spanish Law is contrary to the fundamental requirement of legal certainty (it allowed the tax authorities to challenge a limitation period which had already expired vis-à-vis the taxpayer).
• In relation to the 150% penalty, the CJEU rejects it for being excessive and of a highly punitive nature given that such penalty together with the unjustified capital gains and the flat-rate fines may result in the total amount payable by the taxpayer exceeding 100% of the foreign assets or rights.
• Lastly, in respect to the fixed penalties, the Court determines that they are disproportionate since those flat-rate fines are applied concurrently with the proportional fine of 150% and notes that their amount is disproportionate to the amount of the fines which penalize failure to comply with similar obligations in a purely domestic context in Spain.

Key takeaways

This judgment does not eliminate the obligation to file Form 720. Although a case-by-case analysis should be made, taxpayers affected would be entitled to challenge the unjustified capital gains of the personal income tax and penalties imposed for non-compliance with Form 720 obligations. In addition, it is expected that the Spanish Government will amend the current legislation regulating tax Form 720 in order to comply with EU Law.