The CJEU concludes that the consequences of non-compliance with the obligation to file “Form 720” are contrary to the free movement of capital

The Court of Justice of the European Union (‘CJEU’ or ‘Court’), in its judgment of 27 January 2022 (Case C-788/19), has ruled on the action for failure to fulfil obligations under EU law brought by the European Commission so as to determine whether or not the Spanish legislation governing the obligation of tax residents in Spain to declare assets or rights held abroad - 'Form 720' - is compatible with European law. It should be recalled that, according to said legislation, residents in Spain who fail to file the information return in respect of overseas assets or rights or, as the case may be, make a late or incorrect filing, are liable both to regularisation of the tax due on the amounts corresponding to the value of those assets or rights, even where they have been acquired during a time-barred period, and to the imposition of fines, both proportional and flat-rate.

The CJEU, having approached the analysis of the various issues raised in the action from the perspective of the freedom of movement of capital, has decided that Spain has failed to fulfil its obligations under Article 63 of the Treaty on the Functioning of the European Union and Article 40 of the Agreement on the European Economic Area in this case. Below we highlight the main lines of argument used by the Court to support its position.

First, the Court points out that the obligations arising from the legislation at issue establish a difference in treatment between residents of Spain according to the place where their assets are located, which may discourage them from transferring their assets abroad or, as the case may be, prevent or limit the possibilities of doing so. From that point of view, the Court considers that those rules restrict the free movement of capital.

Notwithstanding the above, as the judgment states, it is necessary to examine whether such a restriction could be justified in view of the objectives pursued by the rule - ensuring the effectiveness of fiscal supervision and combating tax evasion - or whether, on the contrary, the consequences of such a rule go beyond what is necessary to achieve them.

In carrying out such an analysis of proportionality, the Court understands, firstly, that the presumption of obtaining unjustified capital gains established for cases of failure to declare, or of inaccurate or late declaration of assets and rights abroad admits proof to the contrary. Therefore, and contrary to the European Commission's view in this case, it considers that it is a rebuttable presumption, a qualification that is not undermined by the fact that the taxpayer cannot destroy it by claiming that the assets or rights in question were acquired during a time-barred period. And this - the judgment states - because invoking a statute of limitations does not serve to rebut a presumption of tax evasion or avoidance, but only to avoid the consequences that the application of that presumption would entail. Thus, the Court concludes, the presumption in question is not disproportionate to the objectives pursued by the rule.

However, the analysis carried out next on the options chosen with regard to the statute of limitations has merited a different consideration for the Court. It thus considers that the Spanish legislature - which could have established an extended limitation period in order to guarantee the aims pursued by the legislation - has opted to establish an effect of non-applicability of any limitation period that allows the tax authorities to regularise without any time limit, even calling into question a limitation period which has already expired in respect of the taxpayer. Therefore, the Court concludes, by attaching such serious consequences to non-compliance with a declaratory obligation, the Spanish legislature has exceeded what is necessary to guarantee the aims pursued by the legislation, a disproportionality which entails an infringement of the principle of legal certainty and of the free movement of capital.

This opens the door to possible tax adjustments where the taxpayer can prove that the income that allowed the acquisition of the assets subject to adjustment is time-barred. For this, it is sufficient to be able to prove that the taxpayer was the owner of those assets in a time-barred tax period. However, this may be straightforward for real estate, but such an analysis becomes more complicated for financial assets and/or portfolios of securities with a high turnover.

Secondly, the Court also analyses the penalty provided for by the Spanish legislation for failure to comply with, or incorrect or late compliance with, the obligation to file 'Form 720', which takes the form of a proportional fine of 150% of the tax calculated on the amounts corresponding to the value of the assets or rights situated abroad, a penalty which may be applied concurrently with flat-rate fines. The judgment concludes that the very high rate of the proportional fine established for that purpose gives it a highly punitive nature that may lead, in a number of cases, to the total amount of the sums payable by the taxpayer exceeding 100 % of the value of the assets or rights in question, which is disproportionately detrimental to the free movement of capital.

Finally, the Court analyses the flat-rate fines that the eighteenth additional provision of the Taxation Act (‘LGT’) provides for taxpayers obliged to file 'Form 720', applicable to each data item or set of data which is missing, incomplete, incorrect or false, or declared late or not declared digitally, where there is an obligation to do so. Having found that the amount of such fines is not proportionate to the penalties imposed for similar infringements in a purely national context - Articles 198 and 199 LGT - the Court also finds in this case an unjustified restriction on the free movement of capital.

The legal doctrine resulting from this ruling of the Court of Justice of the European Union has important consequences that transcend the regulatory level, reaching taxpayers who regularised their tax situation following the "rules regulating form 720", or who were subject to administrative regularisation, including the imposition of tax penalties. The way to channel the review of these regularisations will depend on the specific case, without ruling out the use of State liability in its legislative capacity in accordance with the provisions of Act 39/2015 and Act 40/2015. For these purposes, it should not be forgotten that Article 32(5) of the latter statute has been appealed before the Court of Justice of the European Union, insofar as it makes the aforementioned liability, when the harm is a consequence of the application of a rule held contrary to European Union Law, subject to cases in which the aggrieved party has obtained, in any instance, a final and conclusive judgment rejecting an appeal against the administrative action that caused the harm whilst claiming the infringement of European Union law found subsequently.

And finally, it will be necessary to analyse how the Spanish legislator will react to this ruling. In this regard, it is important to note that in no case has the Court prohibited Spain from establishing a declaration of assets and rights owned by the taxpayer. The filing of the information return for 2021 (before 31 March 2022) will therefore continue to be mandatory. On the other hand, it cannot be ruled out that the legislator intends to establish a somewhat longer limitation period for overseas assets and rights. This is supported by the case law of the CJEU, provided that such a difference is justified and reasonable, and without going as far as the non-applicability of the statute of limitations sought in 2012. The penalty system may also be modulated in order to respect the principle of proportionality.

In short, this is a very important ruling for the Spanish tax system that requires a specific analysis of all existing situations.