Since the introduction of legislation in 2012, (LEY 7/2012, de 29 octubre, de prevención y lucha contra el fraude fiscal), Spain has required all Spanish residents to make an overseas assets declaration, notifying the authorities of the worldwide assets that they own or control.
Under the Law, failure to make an overseas assets declaration, or submission of an inaccurate one, would result in costly penalties. Unreported overseas assets that were later discovered by the authorities, were treated as undeclared income on which tax should have been paid. The fines and penalties for such could amount to more than 150% of the undeclared asset value.
Whilst the law was aimed at deliberate high level tax evaders, the fact it allowed penalties to be imposed simply for non-declaration of overseas assets, meant that expats and other foreigners living in Spain, who are likely to have such assets, could fall foul of this rather intrusive legislation.
Indeed many received harsh penalties, simply for making the declaration late or making a mistake on the form, despite having legitimately acquired their overseas assets BEFORE taking up residency in Spain.
European Court of Justice Ruling on the Overseas Assets Declaration Law
On the 27th January this year, the European Court of Justice passed it’s ruling, agreeing with the European Commission, that the penalties Spain imposed for failing to properly disclose overseas assets were excessive and contrary to EU statutes and principles.
The three judges ruled that the excessive sanctions for incorrect or late compliance are disproportionate and discriminatory. Adding that the penalties may deter businesses and individuals from investing or moving across borders in the EU single market, thus interfering in key founding principles of the EU, the four freedoms.
As the ruling is binding, Spain faces the possibility of huge fines if it does not amend the law. Spain has already taken steps to do so. A recent headline in El Pais – Cincodias reads ‘Treasury Corrects the Sanctioning Regime of Model 720 and Equates it to the General’. The article further explains that the Senate has approved a series of amendments that set the statute of limitations at 4 years, removing the former scope of the law to look back on an unlimited basis.
So the tax office can now only review or investigate overseas assets declarations going back 4 years, and if you had assets abroad, and you can show that they originated in years outside this, you cannot be taxed or penalized for undeclared income. It is yet to be revealed how the sanctioning regime in general will be adjusted to make the Law comply with the EU ruling.
The EU agree with the principle of the law, so putting aside the EU ruling regarding penalties and sanctions, the declaration of overseas assets continues to be mandatory, for all residents in Spain.
Overseas Assets Declaration – Modelo 720
The overseas assets declaration is an information gathering exercise, and not a tax return, so someone making or considering an overseas assets declaration should be aware that they are not declaring assets so that they can be directly taxed. They should however be mindful that declaration of certain types of assets, may make the authorities aware of sources of income or capital gains for example, that could be deemed to be subject to tax in Spain. It is also important therefore, to make sure that assets are organised efficiently in order to avoid paying additional tax or amounts unnecessarily.
An overseas assets declaration is made by completing a form known as ‘Modelo 720’. The deadline for submitting the form is the 31st of March. Generally speaking the declaration only needs to be made once, as subsequent declarations are only necessary if assets have been acquired, or disposed of, or if existing declared assets have increased in value above a given amount.
It remains a legal requirement to make an overseas assets declaration in Spain however as the risk of high penalties for simply making a mistake have been removed Spanish residents can now make their declarations without worrying that they might be harshly penalised for actually doing no wrong.
Whilst this law and reporting requirement might seem intrusive, it is in reality only a small move by the authorities, in their steps to counter the country’s rampant tax evasion. For British expats, in particular retirees, Spain can actually be quite tax efficient.
Read more about the Modelo 720 – Overseas Assets Declaration Form
If you have concerns relating to the overseas assets declaration, we recommend that you consult a relevant and suitably qualified professional.
Would you like to speak to someone about your Overseas Assets Declaration?
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