Spanish Anti-avoidance Tax Law Violates EU Treaties

The recently-decided case of Commission v Spain concerns a Spanish rule designed to combat tax avoidance. The Spanish law in question provides that

1. Persons taxable in Spain are required to provide information to the Spanish revenue authorities regarding assets owned or beneficially enjoyed outside of Spain.
2. Failure to adequately provide such information, whether deliberate or not, is an offence liable to punishment by way of significant fines.
3. Where such a taxpayer is found to have assets outside of Spain that do not ‘correspond to income or capital declared by the taxpayer’ in Spain then those assets will be taxed as ‘unjustified capital gains’.

Crucially, with respect to this final measure, Article 39 of Ley 35/2006, which concerns ‘Unjustified capital gains’, provides that

the possession, declaration or acquisition of assets or rights for which the obligation to provide information referred to in the eighteenth additional provision of the [General Tax Law] has not been complied with within the prescribed period shall be treated as unjustified capital gains and included in the general taxable amount for the earliest tax year which has not yet become time-barred and may still be regularised.

The effect of this provision is to remove the benefit of Spain’s statute of limitations – ordinarily four years from the end of the voluntary filing period – from such a taxpayer.

The Commission brought an action for enforcement against Spain under Article 258 TFEU on grounds that the Spanish rules breached under Articles 21, 45, 49, 56 and 63 TFEU, as well as the corresponding provision of the EEA agreement. In accordance with the settled case law of the Court, where an action concerns more than one freedom, the Court will examine the dispute only with respect to the freedom it deems most pertinent. Unsurprisingly, the freedom concerned in this case is Article 63 TFEU, which provides that ‘all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.’

The contention of the Commission was that the Spanish measures have the effect of deterring Spanish residents from transferring their assets abroad. Spain, by contrast, argued that taxpayers who conceal assets abroad should not benefit from treaty freedoms pertaining to free movement of capital and that, in any event, the measure is justified on grounds of fiscal supervision and that taxpayers with foreign assets are not in the same position as those whose assets are located within Spain. While accepting the need to ensure adequate fiscal supervision, the Commission argued that the Spanish measures were disproportionate as they went beyond what was necessary to attain this objective. The Commission took particular exception to the fact that even partial or late submission of the relevant information gave rise to

an irrebuttable presumption that undeclared income has been obtained, equal to the value of the assets or rights at issue, resulting in the taxation of the corresponding sums in respect of the taxpayer, without the latter being able to rely on the rules on limitation periods or to avoid taxation by arguing that he or she has, in the past, paid the tax due in respect of those assets or rights.

The Court re-iterated its previous jurisprudence that the mere fact that a taxpayer has assets outside of the Member State cannot give rise to a general presumption of tax avoidance. In the instant case, the Court further reasoned that

a provision which presumes the existence of fraudulent behaviour on the sole ground that the conditions laid down therein are satisfied, without giving the taxpayer any opportunity to rebut that presumption, goes, in principle, beyond what is necessary in order to achieve the objective of combating tax evasion and avoidance.

The Court further found that the effect of the removal of the time limits for including such assets in a tax assessment went beyond what was necessary for the attainment of the objective of fiscal supervision. The Court also considered the various fines disproportionate, in particular the fact that the quantum of the fines was linked to the value of the ‘unjustified capital gains’, even where the nature of the offence is mere lateness in providing the information or errors in the information provided.

The judgment is the latest in a string of cases in which the Court has stuck-down national anti-avoidance measures on grounds that they violate the free movement of capital or freedom of establishment under the EU treaties (see, to this end, Brady Gordon or the author). In this instance, however, the punitive nature of the Spanish measures, in particular in cases of filing errors, did appear to be disproportionate. Should Spain amend its national law to provide for the same sanctions with respect to domestic assets, however, it may be more difficult for the Commission to bring such a challenge in future.