Treatment of Spanish Capital Gains Arising to Non-resident Individuals

This case concerned the Spanish tax treatment applied to income and gains arising to non-resident and resident individuals.

In October 2004, the Commission formally notified Spain that the tax treatment of non-residents' employment income and capital gains arising in Spain was at that time contrary to Article 39 EC and 56 EC and to Article 28 and 40 of the EEA Agreement. The rate of tax applied to non-residents was higher than that for residents of Spain and this could constitute discrimination under the EC Treaty unless Spain could justify the different treatment. Spain adopted necessary amendments, which were put in force on 1 January 2007.

The Court had to consider whether Spain, by having treated differently capital gains realised in Spain according to whether they were made by non-residents or residents up until 31 December 2006, was in breech of its obligations under Article 56 EC and Article 40 of the EEA Agreement.

Under the Spanish legislation applicable until 31 December 2006, capital gains realised in Spain by non-resident taxpayers upon a disposal of assets were taxed at a flat rate of 35% whereas those realised by residents were taxed according to a progressive scale or at a flat rate of 15% where those assets had been owned for more than one year. The Commission claimed that there was no objective difference between resident and non-resident taxpayers and the different tax rates applied constituted discrimination for the purposes of the Treaty. In accordance with case law, the higher tax rate could only be justified where there is a direct link between the granting of a tax advantage and the offsetting of that advantage by a fiscal tax charge.

Spain submitted that since the situation of resident taxpayers and non-resident taxpayers were not comparable in relation to the taxation of capital gains, the fact that there is not one identical body of rules does not constitute discrimination. The Court recalled that Article 56 EC prohibits restriction on the movement of capital subject to the provisions of Article 58 EC and that it is clear under Article 58 that Member States may distinguish between resident and non-resident taxpayers in so far as the distinction does not constitute a restriction on the free movement of capital. In this case, the Spanish legislation provided for a different treatment of residents and non-residents as regards the rate of tax applied to capital gains. The Court went on to declare that the different treatment of tax benefits for resident and non-residents by Member States is not, as a rule, discriminatory having regard to the objective differences between the situation of residents and of non-residents.

Spain further submitted that in accordance with case law, a Member State is free to ensure compliance with its obligations under the Treaty by entering into double taxation agreements with other Member States. Since Spain had entered into agreements with almost all other Member States, the effects of Spanish taxation are in part eliminated. Therefore there is no restriction on free movement of capital. The Court disagreed and stated that double taxation agreements that are in place cancel out only part of the tax liability of non-residents in Spain. Further, the existence of a double taxation agreement does not mean that the income which a taxpayer receives in a State where he is not resident may not be taken into account by the State of residence.

Spain alternatively claimed that the difference in treatment of the two categories of taxpayers may be justified by an overriding reason in the public interest, such as the need to safeguard the cohesion of the tax system. The Court's opinion was that for such an argument to succeed, a direct link has to be established between the granting of the tax advantage concerned and the offsetting of that advantage by a particular levy. Based on the findings in this case, the Court rejected Spain's argument that the restriction stemming from the legislation at issue was justified by the need to safeguard the cohesion of the national tax system.

Considering all arguments, the Court held that Spain had failed to fulfil its obligations under Article 56 EC and Article 40 of the EEA Agreement

The full judgment can be downloaded from http://curia.europa.eu/jcms/jcms/Jo2_7024/