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Inheritance in Spain with a non-resident, expat or foreigner

Spanish inheritance tax and property registration for non residents, expats and foreigners
Firmalex > Inheritance in Spain with a non-resident, expat or foreigner

Inheritance in Spain with a non-resident, expat or foreigner

Introductory guide

With this guide we intend to give an introductory approach to the basic and most common concepts and Spanish taxes that a person involved in an inheritance with a non-resident (read this article to find out when it is considered a non-resident person in Spain) or foreigner may face.

This guide is in no way a substitute for professional advice, as a thorough investigation of the various personal circumstances is required to give the best and most profitable tax advice.

Please do not hesitate to get in contact with us and we will be glad to provide you with the best solution for your situation.

 

Index of the guide
  1. Introduction
  2. In which country should I pay tax?
    1. The 2012 European Regulation
  3. Spanish regulations
    1. The original law
    2. The 2014 ruling of the Court of Justice of the European Union
    3. Non-EU foreigners
    4. Latest amendments
  4. Characteristics, subjects and groups
    1. General characteristics
    2. Who is subject to its liquidation?
    3. Groups according to the degree of kinship
  5. Where to pay inheritance tax
  6. How inheritance tax is calculated
  7. Inheritance tax by Autonomous Communities
    1. Reductions for disability
  8. When the assets are companies
  9. Deadlines for paying the tax

 

1.- Introduction

With globalisation, inheritances and donations with non-residents or foreigners are becoming more and more frequent. For example, when a parent resident in Spain with a child living abroad dies, or when a foreigner living in Spain receives an inheritance from a relative resident abroad.

In order to clarify how Spanish Inheritance and Gift Tax (ISD) works in such cases, we have published this series of articles which are intended as a guide to the most important points on how to act in the event that the inheritance involves non-residents or foreigners.

2. In which country should I pay tax?

2.1. The 2012 European Regulation

As we mentioned in our article “Inheritance with property abroad“, the EU Regulation 650/2012 of 4 July 2012 (applicable from 17 August 2015), which regulates inheritance upon death, brought great advances for European citizens, It made it possible to choose the country of the law applicable to the succession of a person if, prior to his or her death, a record has been made in his or her will, and the previous rigid criterion of the deceased’s nationality is no longer applied, which caused problems for those who had long-established residence in another country but who did not have the nationality of that country.

The European regulation, given the different inheritance systems coexisting in Europe, gives prevalence to the autonomy of the testator’s will. Thus, any person may choose the law of the State whose nationality he or she possesses at the time of making the choice or at the time of death. That is to say, a German resident in Spain can choose German law to govern his future succession or an English citizen resident in Spain can choose English law, as these are the laws corresponding to their nationalities at the time of the testamentary disposition.

In the case of persons having several nationalities, they may choose the law of any of the States whose nationality they possess at the time of making the choice or at the time of death. If the country whose law applies to the succession upon the death of a citizen in Spain (or in another EU State) has not been specified, as a general rule the law of the country of the last habitual residence at the time of death, i.e. the law of the country in which the deceased spent more than 183 days out of the 365 days prior to death, will apply to his or her succession.

3. Spanish regulations

The Spanish regulations regarding the taxes derived from an inheritance process in Spain have undergone various modifications in recent years. The most important milestones are detailed below.

3.1. The original law

Inheritance and Gift Tax is regulated by Law 29/1987 of 18 December 1987 on Inheritance and Gift Tax. In simplified terms, this tax is called ISD.

3.2. The 2014 ruling of the Court of Justice of the European Union

In the case of applying Spanish rules, until the end of 2014, in all inheritances and donations with non-residents, ISD had to be paid to the State and applying state rules (up to 34%). They were not allowed to apply regional tax benefits.

This was extremely unfair in many cases. For example, a parent resident in Madrid died with a child resident in Spain who could pay in Madrid with a 99% rebate, and with another child resident in Germany or the USA who was obliged to pay much more.

Following a complaint by the European Commission, the European Court of Justice ruled on 3/9/2014 that this discrimination violated EU law and specifically the free movement of capital.

This important ruling of the CJEU forced the immediate modification of the regulations at the end of 2014, through Law 26/2014, which ruled that non-residents in Spain could apply the regional tax benefits if they were resident in another EU or European Economic Area country.

3.3. Non-EU foreigners

Non-EU foreigners were initially left out of this benefit, until in 2018 the Supreme Court, in accordance with CJEU case law on the scope of the principle of free movement of capital enshrined in Article 63 of the Treaty on the Functioning of the European Union, ruled that the effects of the CJEU ruling of 3 September 2014, were also applicable to residents in non-EU countries.

Therefore, the regime regulated in said additional provision will be applicable in relation to all non-residents, regardless of whether they reside in a Member State of the European Union or of the European Economic Area or in a third country.

3.4. Latest amendments

Despite being laws of general application, changes in the applicable legislation are common, such as the recent change in the calculation of the taxable base for wealth taxes which we discussed in our article “The new anti-fraud law in Spain: Property taxation” or the change on lifetime inheritance which we discussed in “The new anti-fraud law in Spain: Inheritance during lifetime“. Therefore, it is always advisable to have the legal advice of a good law firm to achieve the best result in this type of proceedings.

4. Characteristics, subjects and groups

4.1. General characteristics

Inheritance and Gift Tax is characterised as follows:

    • Direct.
    • Personal.
    • Subjective.
    • Progressive.
    • Self-payable, according to the system established in some communities.

4.2. Who is subject to its liquidation?

There are three types of persons liable to pay ISD:

    • Heirs, legatees and beneficiaries of inheritance titles.
    • Donors or beneficiaries of any other legal transfer between living persons.
    • Beneficiaries of life insurance policies.

4.3. Groups according to the degree of kinship

However, it is necessary to take into account the degree of kinship. For this purpose, the law establishes four groups for the settlement of the tax:

  • Group 1: Beneficiaries under 21 years of age.
  • Group 2: Beneficiaries over 21 years of age.
  • Group 3: Second and third degree collaterals, and ascendants and descendants by affinity.
  • Group 4: Fourth-degree collaterals and more distant relatives.

The relationship between the pre-existing wealth and the degree of kinship provides a multiplier coefficient that affects the inheritance tax liability to obtain the tax liability.

This parameter is important, since for example in some communities, those in group 1 only pay symbolic amounts and those in group 2 are practically free of taxation or have very important reductions.

5. Where to pay inheritance tax

The presentation of the documentation for the settlement and payment of the tax, from a territorial point of view, is subject to the following provisions:

    • Inheritance: at the place of habitual residence of the deceased or of any of the heirs if they were resident in Spain. If this is not the case, it must be filed at the Madrid Tax Office.
    • Donations: in the case of real estate, it depends on the location of the property and its value. For example, if there are several properties located in different Autonomous Communities, the presentation and settlement of the tax will be in the Autonomous Community where the property with the highest value is located. When the property is located abroad, it must be filed with the Madrid Tax Office. In the case of movable assets, in the place of residence of the donee or, if they are of different value, where the person receiving the asset of greater value resides.

6. How is inheritance tax calculated?

The procedure includes different calculations based on state and autonomous community regulations.

However, in simplified terms, the calculations to be made can be summarised as follows:

    • Gross estate, consisting of the real value of the assets and rights.
    • Net inherited estate, which is the result of subtracting the deductible charges, debts and expenses from the above.
    • Individual inheritance portion, dividing the net estate by the number of heirs and what corresponds to each one according to the will or inheritance law.
    • Taxable base, adding the life insurance, if any, to the inherited portion.
    • Liquid base, applying the reductions to the taxable base according to the Autonomous Regions. For example, they may include reductions for kinship, disabilities, type of assets, among others.
    • Full tax liability, applying the rate or percentage of the tax to the taxable base. The state regulation establishes that the rate can range from 7.65% to 34% of the net tax base. As it is a progressive tax, the more you inherit, the more you have to pay.
    • Tax rate, which is the result of applying the multiplier coefficient to the total tax rate. It varies according to the increase in wealth and the family group.
    • Total to be paid, applying to the tax liability the deductions and allowances determined by each Autonomous Region. For example, the Community of Madrid establishes a rebate of 99% for group 2.

7. Inheritance tax by Autonomous Communities

Inheritance tax is a national tax managed by the Autonomous Communities, so they can incorporate regulations in many aspects.

As we have repeatedly mentioned in previous points, each Autonomous Community can apply its own allowances and reductions, so that the same inheritance would pay much more tax in some than in others.

This fact is important to bear in mind, as for example in some communities, those in group 1 only pay symbolic amounts and those in group 2 are practically tax free or have very important reductions.

The taxable base is determined by applying to the taxable base the indices provided for in Law 21/2001, which refers to the financing system of the Autonomous Communities.

To find out more about the particularities of the Autonomous Community in which you have to pay your taxes, contact us and we will provide you with the parameters for the correct calculation in accordance with the regulations in force in each case.

7.1. Reductions for disability

The Royal Legislative Decree 1/1994 also has an influence, to apply reductions in case of disability of the beneficiaries of an inheritance or donation.

8. When the assets are companies

When what is transferred by donation or inheritance is a company, this operation is also subject to Inheritance and Gift Tax.

However, in order to encourage the continuity of such a company, different incentives have been foreseen that reduce the compulsory taxation on condition of maintaining the business activity.

The reduction is related to the kinship group to which the heirs belong and the minimum time the company must be maintained, which is 10 years, although some autonomous regions have limited it to shorter periods.

9. Deadlines for paying the tax

For inheritances, there is a deadline of 6 months from the death or declaration of death of the owner. An extension of 6 months can be requested within 5 months of the death.

If the extension is granted, late payment surcharges must be included in the settlement. The request must be well-founded, accompanied by an approximate valuation of the assets subject to taxation.

If it is not granted, the time limit is extended by a number of days equal to the number of days elapsed from the submission of the application until notification of the refusal. If the deadline has expired and the application has not been submitted, a provisional assessment may be made. Finally, for donations, the time limit is 30 days from the act of donation.

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