Spanish Supreme Court Rulings on Wealth Tax Benefit Nonresidents

The Spanish Supreme Court has ruled in two recent cases that the country’s wealth tax discriminates against nonresident individuals because, unlike residents, they couldn’t apply a crucial benefit known as the “tax shield.”

The rulings represent a major step toward eliminating discriminatory wealth tax rules against nonresidents. By allowing nonresidents to access the joint personal income tax-wealth tax limit, the court is opening the door for refunds, improved planning, and more confident investment in Spain.

For nonresidents, this is a legal and financial milestone, reinforcing Spain as an attractive investment environment. For those looking to invest in real estate in Spain, these judgments may help reduce their Spanish tax bill.

Spanish Tax System

Spain is one of the few countries that levies a wealth tax alongside personal income tax and inheritance/gift tax. The wealth tax applies annually on net wealth at progressive rates from 0.2% to 3.5%. Tax residents are taxed on worldwide assets, while nonresidents are taxed only on Spanish assets.

The wealth tax includes various exemptions, deductions, and reductions, particularly at the regional level. While the tax can appear complex, proper planning allows lawful minimization of liability.

Two important wealth tax benefits are the family business regime and the tax shield, also known as the joint personal income tax-wealth tax limit. The Spanish Supreme Court rulings focus on the latter.

Under existing law, Spanish tax residents can apply the tax shield. Historically, nonresidents were denied this benefit.

The tax shield caps combined personal income tax and wealth tax liability at 60% of the personal income taxable base. Any wealth tax exceeding this cap is reduced, up to 80% of the original wealth tax. In optimal scenarios, taxpayers may pay only 20% of their original wealth tax.

Key calculation rules are:

• Long-term capital gains are excluded from the personal income tax.
• Non-productive assets, including the habitual residence, are excluded from wealth tax

The tax shield was introduced in 1991 to prevent wealth from becoming confiscatory. Article 31.1 of the Spanish Constitution requires a fair, proportional tax system. Some wealthy taxpayers may have significant assets but modest income. The tax shield ensures they aren’t forced to sell assets merely to pay wealth tax, preserving fairness and avoiding confiscation.

‘Different Treatment’

The court considered two cases involving a Belgian resident who owned property in the Balearic Islands. He paid wealth tax as a nonresident without applying the tax shield and requested a refund of the overpaid amounts.

His claims were initially rejected by the tax authorities and the Central Economic-Administrative Court, but the Balearic High Court ruled in his favor in 2023.

The Spanish Supreme Court reviewed wealth tax law, the EU principle of free movement of capital, and non-discrimination principles. It concluded that tax residents and nonresidents are in comparable positions since wealth tax applies to asset ownership in both cases.

The Spanish Supreme Court stated that tax residence, whether in Spain or abroad, doesn’t justify the different treatment of residents and nonresidents as the joint personal income tax-wealth tax limit isn’t applicable to the latter. The court held that “This difference is discriminatory and unjustified.”

The rulings reaffirm that Spanish wealth tax law discriminates against nonresidents. Although the cases involved an EU resident from Belgium, the court clarified that the principle of free movement of capital extends globally.

However, the rulings don’t specify how to implement the tax shield in practice, and trigger new questions:

• Does it apply if the nonresident lives in a country without tax information exchange agreements?
• Should foreign taxes be considered in calculating the limit, or only Spanish wealth tax and personal income tax?
• How should differences in taxable base definitions between countries be addressed?
• What if the country of residence has no general personal income tax or wealth tax?

These questions will need to be resolved through future legislation, guidance, and administrative practice.

Future Implications

The rulings should prompt nonresident taxpayers to:

• Review past wealth tax payments. This applies to wealth tax filings that aren’t time-barred to assess eligibility for refunds.
• Enhance tax planning. Investors may adopt more sophisticated strategies, such as using companies or structuring their income, to minimize Spanish tax liabilities.

Overall, the court’s decisions improve the fairness of the Spanish wealth tax system, encouraging foreign investment. Investors can structure holdings in a tax-efficient and secure manner while benefiting from the joint personal income tax-wealth tax limit.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Xavier Segui is a partner at NAX Law.

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