Consequences of the Court of Justice of the European Union ruling on the requirement to declare overseas assets or rights (form 720)

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The Court of Justice of the European Union (hereinafter, “CJEU”) has declared the general rules on penalties for tax offences related to the informative declaration of overseas assets and rights  goes against the Treaty on the Functioning of the European Union (hereinafter, “TFEU”), opening various means of redress for taxpayers who have been adversely affected by this legislation.

On 27 January 2022, the CJEU ruling for case C-788/19 was published on its website, where the Court ruled that certain aspects of the Spanish regulations on the informative declaration of assets abroad (commonly referred to as “form 720”) constitute a restriction on the free movement of capital recognised in art. 63 of the TFEU and art. 40 of the European Economic Area Agreement (hereinafter “EEA Agreement”).

The obligation for residents in Spain to declare assets and rights located abroad through form 720 was introduced in the General Tax Law in 2012. These measures were approved in response to economic globalisation, particularly in the finance sector, as well as to “the rise in fraudulent activity that exploits this situation". Taxable persons, for both Personal Income Tax and Corporate Income Tax, must use this form to declare accounts in financial entities, shares and holdings in institutions, life or disability insurance, annuities and real estate assets and rights whose value exceeds certain thresholds. This obligation extends to any changes or disposals of such assets and rights. A failure to declare such assets and rights, or the filing of an incomplete submission, or the untimely submission of such, all led to severe penalties.

The sanctioning proceeding gave rise to the non-compliance case initiated by the Commission, which was finally resolved through the CJEU’s ruling. The CJEU argued that the consequences of failure, or of partial or late compliance, were disproportionate and a restriction to the free movement of capital, possibly leading to other Member State or third-party residents to avoid investing in Spain or limiting their possibilities to do so.

To this effect, the CJEU concluded that said legislation is contrary to Art. 63 TFEU and 40 of the EEA Agreement in three key aspects:

  • Firstly, by having as a consequence of taxpayers subject to Personal Income Tax o Corporate Income tax failing to declare assets and rights located abroad on time, via form 720, the classification of such assets as ‘unjustified capital gains’ without the possibility of benefiting of the limitation period. According to the CJEU, these measures, in addition to entailing a non-applicability of any limitation period, also allow the tax authorities to call into question a limitation period that had already expired vis-à-vis the taxpayer, which constitutes a breach of the requirement of legal certainty. By attributing such severe consequences to infringements regarding the obligation to declare assets abroad, Spain has implemented disproportionate measures that go beyond what is necessary to ensure effectiveness in tax inspections and to fight against tax fraud and evasion. 

  • Secondly, by subjecting the failure to comply, or the partial or late compliance, with the obligation to provide information concerning assets or rights located abroad to a proportional fine of 150% of the tax owed due to the “unjustified capital gains”, based on the value of said undeclared assets or rights located abroad. The CJEU considered that such a high penalty based on a failure to declare certain assets, with no adjustment options, was excessively repressive. Furthermore, since there are also flat-rate fines to be added to the aforementioned penalty, in some cases the total amount to be paid may exceed the total value of the assets or rights abroad. The CJEU considered that this constitutes a disproportionate impairment on the free movement of capital.

  • Finally, by imposing disproportionate flat-rate fines on the failure to comply, or the partial or late compliance, with the obligation to provide information concerning assets and rights located abroad, which are more severe than the penalties laid down by the general rules for similar offences, where there are no limitations on the total amount. The CJEU considered that such disproportionality constitutes an unjustifiable restriction on the free movement of capital.

Notwithstanding the above, the unlawfulness of said consequences will not affect the provisions regarding the entire tax declaration, which remain in force.  

This ruling opens several means of redress for taxpayers who have been adversely affected by the general rules on penalties, declared unlawful by the CJEU, which will have to be analysed on a case-by-case basis, depending on the individual situation of each taxpayer.

Moreover, the government has already announced its intention to rectify these general rules associated with the informative declaration of assets and rights abroad, to ensure they are proportional and guarantee a limitation period. We must pay attention as new windows of opportunity may arise for taxpayers who have not yet declared their assets and rights abroad.