The inheritance law in Spain

In its judgment of 3 September 2014, the European Court of Justice had held that the arrangements currently in force to the taxation of inheritances and gifts in Spain do not match with European law. The levied inheritance and gift tax in Spain is a state tax levied with progressive tax rates, which ranges from 7.65 to 34 percent.

Tax rates on inheritances and gifts in Mallorca

As the state has issued the competences of the taxation of inheritances and donations between tax resident in Spain to the autonomous regions, they have used their room for manoeuvre and granted significant tax relief to its residents. So, the taxation on the Balearic Islands between direct relatives is maximal one percent for inheritances and seven percent for gifts.

If in the case of inheritances or gifts a person is involved, who has not a residence in Spain, or it is about a foreign real estate, the person will pay the much higher tax rates regarding the tax regulations of the state. According to the European Court of Justice this is an unambiguous difference in treatment between residents and non-residents, as well as a restriction on the free circulation of persons and goods, so the Spanish Government is forced as to eliminate this discrimination, and the tax legislation has to be amended accordingly.

Draft amendment to the taxation of inheritances and donations

1) To do this, a draft amendment was submitted by the ruling people’s Party in Parliament which deals with the taxation of inheritances and gifts and aims at measures which will lead to equality between residents and non-residents. So is aimed at, for example, that also non-residents will get tax relief if they can prove that they have a close bond to the competent autonomous community. There is a distinction between two cases:

If the testator of the inheritance was not resident in Spain, but had instead his domicile in another country of the EU or EEA, then the heirs (whether resident or non-resident) will pay tax on the inheritance according to the tax rates in the competent autonomous community, where the majority of the assets in Spain is located. For example: If the testator had his domicile in Germany, but his assets is located on the Balearic Islands in the form of bank accounts or real estate on Mallorca, his direct relatives would benefit from the flat tax rate of the Balearic Islands by just one percent.

It is however problematic, if the testator with resident in Germany has no assets in Spain, but want to bequeath his in Germany existing property to his heir who is resident on Majorca. In this case the heir will unfortunately not get the tax rate of the Balearic Islands and have to pay up to 34 percent as listed in the state-progressive table.

2) If the testator is resident in any one autonomous region of Spain, and the heirs have their resident in an EU Member State or EEA, the estate would be taxed according to the tax rates of those autonomous region, where the testator had lived most recently.

Testamentary gifts in Spain

For a testamentary gift in form of a real estate in Spain, the donee (residents and non-residents) has to pay the taxes in the autonomous region where the property is situated. For example, on the Balearic Islands the taxes for a direct relative would be seven percent for a Mallorca property.