EXEMPTION FROM WEALTH TAX ON REAL ESTATE HELD INDIRECTLY BY A NON-RESIDENT: the High Court of Justice of the Balearic Islands upholds the contentious-administrative appeal lodged by our firm.

The High Court of Justice has dealt a major blow to the Spanish Tax Agency in its battle to subject non-residents in Spain for tax purposes to Wealth Tax on real estate held indirectly through a non-resident entity.

The existing dispute comes from a situation in which an individual, who is non-resident in the Spanish territory for tax purposes, holds shares or stock in a non-resident company, whose assets consist for at least 50%, directly or indirectly, of real estate located in Spain.

This would be the case, for example, of an individual resident for tax purposes in Germany, who holds shares and stock in a German company whose assets consist for at least 50% of real estate located in Spain; or when the assets of the said German company consist for at least 50% of shares or stock in a Spanish company which owns real estate located in the Spanish territory. 

This is an important matter since this is a very common situation in the most attractive regions for the real estate business within the Spanish territory, such as the Balearic Islands.

In that sense, with reference to the domestic legislation regulating Wealth Tax[1], individuals who are non-residents in the Spanish territory, in contrast to residents (who are subject to unlimited Wealth Tax liability, i.e., on the whole of their wealth worldwide, regardless of where those assets are located or the rights may be exercised), shall be subject to tax only on assets located, and rights exercisable, in the Spanish territory of which they are holders (known as limited tax liability).

According to the above, and taking into account that shares and stock in a company grant their holders rights which are exercisable in the state of residence of the company, there is no getting away from the fact that an individual non-resident in the Spanish territory, who holds shares or stock in a non-resident entity, shall not be liable for Wealth Tax on the ownership of such shares or stock, regardless of whether the assets of the non-resident entity consist for at least 50% of real estate located in the Spanish territory.

Despite of the categorical nature of the domestic legislation regulating Wealth Tax, the Directorate General for Taxation (DGT) has provided for a different tax treatment for non-resident individuals who indirectly own real estate located in the Spanish territory, as above mentioned, in those cases in which there is a convention for the avoidance of double taxation (CADT) which empowers the Spanish state to subject such indirect ownership to taxation, by arguing that such shareholding held by the non-resident would be subject to Wealth Tax, under limited tax liability[2].

The DGT’s criterion has an important impact ratio, since there are many CADTs granting such power to the Spanish state affecting, inter alia, tax residents in Germany, Saudi Arabia, Belgium, Slovenia, France, Luxembourg, Mexico, Norway, United Kingdom or Uruguay who are in this situation.

In this respect, our firm had always held that such distinction in the tax treatment lacked a legal basis because, despite of the powers granted by a CADT to the Spanish state to subject this factual situation to Wealth tax, the domestic legal system in Spain makes no provision for a non-resident for tax purposes (subject to Wealth Tax under limited tax liability) to be subject to Wealth Tax on assets not located, or rights not exercisable, in the Spanish territory, so that, as long as such possibility is not provided for in the domestic regulatory framework, the only result possible is the exemption from tax of such factual situation.

The position of our firm, which until now was rejected by the Tax Agency and by the Regional Economic-Administrative Court of the Balearic Islands, was put on trial before the Contentious-Administrative Division of the High Court of Justice of the Balearic Islands, a judicial panel which, on the occasion of its judgment on 3 December 2020, has found that the appellant was right, ruling that, despite of the powers granted by a CADT to Spain (in the case being judged, the CADT entered into between Spain and Germany) to subject a non-resident to Wealth Tax on the ownership of shares or stock in a non-resident entity whose assets consist for at least 50%, directly or indirectly, of real estate located in Spain, the Spanish legislation, in relation to such tax, does not provide for that scenario as a taxable event and, therefore, there is no room for the Wealth Tax to be payable since the non-resident is not holder of rights exercisable or realisable in the Spanish territory, as the rights granted by shares or stock in a directly owned non-resident entity are only exercisable or realisable in the state of residence thereof.

This is a very important judgement, since it gives convergence to wealth taxation in our state by non-residents for tax purposes in Spain who are in this situation, opening up the possibility to apply for refund of Wealth Tax paid under such circumstances in previous years for which the statute-of limitations period has not expired.

[1]Section One, Article 5 of Law 19/1991, of 6th June, on Wealth Tax.

[2] Vide V0905-13, V1142-14, V0093-16 or V1995-20, inter alia.

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