Spain: Penalties and sanctions imposed on failures to declare overseas assets (CJEU judgment)

Penalties and sanctions for a taxpayer’s failure to declare overseas assets imposed disproportionate restrictions on the free movement of capital

Failures to declare overseas assets (CJEU judgment)

The Court of Justice of the European Union (CJEU) delivered its judgment in proceedings concerning penalties and sanctions imposed when a taxpayer fails to meet the obligation to declare overseas assets under Spanish law.

The CJEU concluded that the penalties and sanctions for a taxpayer’s failure to declare overseas assets imposed disproportionate restrictions on the free movement of capital, and that the penalty regime and the treatment of the value of undeclared assets as capital gains (without a statute of limitations) were null and void.

The case is: Commission v. Spain, C-788/19 (27 January 2022)

Summary

In 2012, Spain enacted legislation that paved the way for a tax amnesty with respect to undeclared assets. At about the same time, legislation was enacted requiring Spanish tax residents to declare overseas assets (using Form 720) and providing for penalties and other tax sanctions in the event of failure to file (or late filing of) Form 720 or if the filed Form 720 contained incomplete, inaccurate or false information. The penalties and sanctions for such failures included:

  • A flat-rate penalty for each data item or set of data incorrectly declared
  • Treatment of the value of the undeclared asset as capital gain without any statute of limitations
  • A penalty equal to 150% of the tax liability flowing from the tax debt

The European Commission initiated an investigation and referred the matter to the CJEU for a determination as to whether the Spanish law was proportionate, and by extension, whether it was compatible with the fundamental freedoms enshrined in EU law.

The CJEU in late January 2022 issued its judgment finding that Spain, with this penalty and sanction regime, had not fulfilled its obligations under the principle of the free movement of capital.

KPMG observation

Are taxpayers who were subject to penalties (or who declared the relevant adjustment late, as a capital gain) able to recover the amounts paid? It appears that the answer to this question calls for a case-by-case analysis of the possible different scenarios.  

Read a February 2022 report [PDF 193 KB] prepared by the KPMG member firm in Spain

 

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