Can the Wealth Tax Be Confiscatory for Non-Residents?

With the implementation of the Solidarity Tax on Large Fortunes (ISGF), the scope of the Wealth Tax (IP) was amended to tax non-residents for the indirect holding of real estate assets located in Spain.
The stated motivation for this change was to eliminate an unjustified positive discrimination in favor of non-residents with real estate assets in Spain through corporate structures, as they were previously not subject to paying the IP, unlike residents.

However, other necessary measures to address the negative discriminatory situations faced by non-residents are lacking. Specifically, non-residents are unable to apply the joint Income-Wealth tax cap, a mechanism that allows limiting the burden of this tax.

In my opinion, this asymmetry lacks any justification and should be promptly addressed by Spain, or else face further legal challenges in European courts under the Principle of Free Movement of Capital.
It is not the first time that Europe has condemned Spain for having discriminatory tax legislation, even requiring the reimbursement of improperly collected taxes under discriminatory laws. For example, non-residents used to pay 35% on capital gains from Spanish sources, while residents only paid 15%. Similarly, the rules of the Inheritance and Donations Tax (ISD) were amended to avoid unjustified asymmetries between residents and non-residents as a direct consequence of the Court of Justice of the European Union’s ruling of September 3, 2014, which allowed non-residents inheriting assets in Spain to apply the regional legislation if it was more favorable than the national law.

The fact that the confiscatory cap (set at 60% of a portion of the personal income tax base) cannot be applied by a non-resident is a violation of the principle of equal treatment and constitutes a barrier to the free movement of capital. This, in our view, finds no support in European law nor any justification for such differentiated treatment.

This cap, which does apply to tax residents in Spain, stipulates that the combined amounts of personal income tax (IRPF) and wealth tax (IP) cannot exceed 60% of the personal income tax base (with certain specificities). Should they do so, the IP would be reduced until this threshold is respected. However, this reduction has a maximum limit of 80% of the IP liability.

The rationale behind this cap is none other than the constitutional mandate to prevent the depletion of taxable wealth under the guise of the duty to contribute. In other words, tax payments must not be confiscatory.

If the justification for this cap is precisely to prevent direct taxes on income and wealth from being confiscatory, it is difficult to understand why this cap is not applicable to non-residents who pay the IP for owning assets in Spain.

Evidently, the IP/ISGF can be confiscatory and, therefore, unconstitutional for non-residents. Firstly, because they also pay income tax in Spain on the income their Spanish assets may generate. Secondly, because non-residents also pay an equivalent income tax in their country of residence on the income generated by these and/or other assets.

It is unacceptable that this confiscatory limit only applies to taxpayers residing in Spain, creating a difference in treatment based solely on residence in an EU Member State or a third country.

Since March 2024, we have been awaiting the Supreme Court’s ruling on this matter, following the admission of an appeal against a ruling from the Balearic Islands’ High Court, which deemed it discriminatory not to apply this cap to a non-resident.

The legal issue of interest is whether the taxpayer’s habitual residence outside of Spain justifies the non-application of the confiscatory limit established in the IP/ISGF, and whether such a difference would be discriminatory towards them.

We hope for a favorable ruling on the application of this limit to non-residents, as has occurred in the past with other discriminatory aspects of wealth taxation.

Undoubtedly, a favorable resolution in this case will exponentially encourage foreign investment in our country.