Andreu Bové Boyd
Partner of Bové Montero y Asociados
A recent ruling of the Supreme Court of Justice (“TSJ”) of the Balearic Islands establishes that non-resident taxpayers of the wealth tax (Impuesto sobre el Patrimonio,”IP”) may benefit from the application of the joint limit, which could result in a reduction of their tax bill.
In general, individuals who are resident in Spain are taxed under the IP on their global net wealth, while non-residents are taxed only on those assets or rights located or exercisable in Spanish territory.
On the other hand, taxpayers who are resident in Spain may reduce their IP tax liability by applying the “joint limit” with the Personal Income Tax (“IRPF”). This limit establishes that the sum of the IRPF and IP contributions should not exceed 60% of the taxpayer’s total income. If this limit is exceeded, the IP liability can be reduced by up to 80%. The idea behind this joint limit is that the lower a taxpayer’s income, the lower the amount of IP to be paid.
The tax savings that can be obtained as a result of this joint limit are such that, together with the family business exemption, it is crucial in Spanish tax planning for high net worth individuals. Furthermore, since the volume and nature of the income generated by a taxpayer in Spain can generate a direct saving in his or her IP, it is essential to have a good knowledge of the tax consequences associated with certain investments in order to achieve a tax-efficient wealth structure.
However, as mentioned above, not all taxpayers will be able to apply the joint limit and thus reduce their IP tax liability. In fact, according to the current wording of the rule, taxpayers not resident in Spain cannot benefit from the joint limit and, therefore, their IP tax liability cannot be reduced according to the taxpayer’s income.
Now, the TSJ of the Balearic Islands has confirmed in its ruling of 1 February 2023 that this situation is arbitrary, discriminatory, and contrary to the fundamental principles of the European Union and, consequently, has declared that non-residents can also benefit from this limit.
Although we must be cautious and wait for the Supreme Court to rule on this matter, the ruling of the TSJ of the Balearic Islands opens the way for non-resident taxpayers to consider challenging their IP self-assessments for the fiscal years for which the statute of limitations has not yet expired and request a refund of the undue income together with the corresponding interest for late payment.
This is another confirmation from the Supreme Court of the Balearic Islands in favour of non-resident taxpayers, as in 2019 it ruled in their favour in relation to the indirect holding of real estate and its taxation in the IP.
This ruling shows once again that there are still many rules in the Spanish tax system that are discriminatory and contrary to our EU law. It is good news that our judiciary is correcting this type of situation and we hope that it will continue on this path of cleaning up the dysfunctions of our system.
