Almost a decade after its overseas asset declaration reporting system was first announced, the European Court of Justice (ECJ) has ruled that Spain infringed the European principle of free movement of capital and will be required to change its regulations around penalties, according to advisory firm Blevins Franks.
Residents of Spain, including British expats, have since 2013 been obliged to submit an annual declaration reporting the assets they own outside Spain – the Modelo 720 (or Form 720) – in addition to annual income and wealth tax returns.
To discourage people from not reporting or underreporting their assets, the Modelo 720 regulation imposes high penalties for failing to file the declaration, filing it late, or including false or inaccurate data.
After several complaints were submitted, the European Commission reviewed its legality and opened an infringement procedure against Spain in 2015. Spain reportedly ignored this, so the commission issued another notice in 2017.
According to Blevins Franks, the ECJ ruled that the penalties were repressive and disproportionally high when compared to those applied for failing to report Spanish domestic assets and income. In many cases, the “penalties and fixed fines amounted to more than 100% of the value of the assets in question”, the advice firm said.
The Spanish authorities will now change its penalty regime.
The ECJ also ruled that the absence of application of the statute of limitation to the tax obligations derived from Modelo 720 infringed the European law principles. From now on, the statute of limitation will be applicable to those tax obligations derived from Modelo 720.
Just the penalty
Jason Porter, director of specialist expat financial advisory firm Blevins Franks, said: “It is important to note that this ruling is just against the penalty regime, not against Modelo 720 itself.
“The obligation to declare offshore assets and what needs to be reported was never called into question. A resident of Spain who owns assets outside the country must submit a Modelo 720 each year.
“Taxpayers will therefore be able to rely in the principle of legal certainty. If four years elapse since they failed to submit, or incorrectly submitted, Modelo 720, the Spanish tax authorities will have lost their right to tax audit the taxpayer and impose penalties.
“Modelo 720 is not a tax return as such, but simply a requirement to report information about assets. It is an annual requirement in addition to submitting income and wealth tax returns.
“It is compulsory for those who meet the criteria to be resident in Spain for tax purposes. It is due by 31 March each year, declaring the offshore assets owned at the end of the previous year, so this year’s form reports 2021 assets.”
Tax residents of Spain have to report all assets in a particular category if the value of total assets in that category amounts to over €50,000 (£41,860, $56,840).
This only applies to assets located outside Spain and the three reporting categories are:
- Accounts held with financial institutions (banks);
- Investments; and
- Immovable property.
