The Court of Justice of the European Union (CJEU) has declared contrary to European law the controversial Declaration of Overseas Assets or Rights, the well-known 'Form 720', which requires tax residents in Spain to declare their assets abroad.
In an informative note, the judges of the court based in Luxembourg say about said Spanish legislation that "the restrictions on the free movement of capital that it imposes are disproportionate."
The European Justice thus knocks down the Spanish 'Form 720', more specifically its very high fines. Spain now has to adjust the law to the terms of the ruling and the taxpayers who have been sanctioned will be able to claim the amounts of the fines imposed from the State.
The judges of the CJEU admit that the objectives pursued by Spain (fight against tax fraud and evasion) with the Form 720 may be justified. But they also point out that the Tax Agency (Agencia Tributaria) goes too far with its methods. "This legislation goes beyond what is necessary to achieve these objectives," they say.
The Court recalls that EU has some "mechanisms for the exchange of information or administrative assistance" between member states for such purposes.
The ruling states that there are three main reasons why the obligation to declare assets abroad worth more than 50,000 euros is "contrary to EU law".
In the first place, the Court considers that Spain has failed to fulfill its obligations under the free movement of capital by providing that the failure to comply with or the partial or late compliance with the obligation to provide information concerning assets and rights located abroad entails the taxation of undeclared income corresponding to the value of those assets as "unjustified capital gains," with no possibility, in practice, of benefiting from limitation.
The second reason has to do with the amount of the penalties, which can be 150% of what was not declared plus other penalties, which the Court considers "disproportionate."
The Court notes that the very high rate of that fine "gives it a highly punitive nature" and that the concurrent application of that fine with the flat-rate fines provided for elsewhere may lead, in a number of cases, to an increase of the total amount of the sums payable by the taxpayer to more than 100% of that taxpayer's overseas assets or rights. "That constitutes a disproportionate interference with the free movement of capital," says the Court.
The third reason explained by the judges also refers to the amount of the sanctions stated by the regulation of Form 720, which establishes penalties of 5,000 euros for each incomplete data provided to the Tax Agency, 10,000 euros for each false data and the total amount is not capped.
The CJEU also takes account of the fact that those flat-rate fines are applied concurrently with the proportional fine of 150% and notes that their amount is disproportionate to the amount of the fines which penalise failure to comply "with similar obligations in a purely domestic context in Spain."
"Consequently, those flat-rate fines introduce a disproportionate restriction on the free movement of capital," the Court concludes.