LUXEMBOURG (CN) — Spain violated EU regulations when it imposed harsh penalties on Spanish residents who failed to declare property and bank accounts they held abroad, the bloc’s top court ruled Thursday.
Siding with the European Commission, the European Court of Justice agreed that the penalties for failing to properly disclose foreign assets on the so-called Form 720 were excessive and could stymy the right of EU citizens to move assets freely across borders. A copy of the decision is not available in English as of press time.
Madrid introduced the new tax regulation in 2012. The government of then-Prime Minister Mariano Rajoy introduced a carrot-and-stick approach to thwarting tax cheats who hid their assets abroad: first, the government instituted a period of amnesty during which residents could declare their holdings without consequence, and then the government imposed harsh penalties on anyone who failed to do so. Fines could exceed the value of the property itself, sometimes up to 150%.
Following several high-profile cases of retirees who were fined hundreds of thousands of euros for improperly filling out forms, Brussels stepped in. The commission — the EU’s executive branch — first brought infringement proceedings against Spain in 2015. It eventually referred the case to the Court of Justice after talks with Spain to change the law failed.
The three-judge panel ruled that Spain violated the EU’s free movement of goods, a foundational concept of the 27-member political and economic union, by treating assets held abroad as “unjustified capital gains” and taxing them accordingly if taxpayers filed their forms incorrectly or late. “That obligation is likely to dissuade, prevent or limit the possibilities for residents of that Member State to invest in other Member State,” the court wrote in a statement about Thursday's result.
The court also found fault with the harsh penalties, calling them “highly punitive” and “disproportionate.” In one famous case, a taxi driver had worked in Switzerland for most of his life but retired to the southern Spanish city of Granada and was fined 442,000 euros ($495,000) for belatedly submitting documentation on his 340,000 euros ($380,000) in retirement savings.
Madrid argued that severe penalties were needed to prevent tax fraud, and that the fines were not imposed automatically but instead given on a case-by-case basis. The court was unswayed, concluding that the “extremely repressive nature” of the fines would likely deter taxpayers in Spain from investing abroad.
The ruling echos the arguments made by a court adviser in 2021. Danish Advocate General Henrik Saugmandsgaard Øe also found the reporting requirements to be in violation of EU law, calling them “disproportionate sanctions.”
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