This decision has been long awaited and has now arrived. The Court of Justice of the European Union has ruled that the system of penalties in the informative tax model 720, which required individuals to report assets and rights located abroad, is contrary to EU law as it is excessively burdensome and disproportionate for the citizen.
Previously, the old rules did not provide for a statute of limitations for non-compliance with the obligation to declare these assets, but at the same time allowed for an extremely high penalty regime with abusive fines that in many cases reached up to 150% of the evaded amount, in addition to the assessed penalties that could even exceed the value of the assets abroad.
The ruling does not repeal Model 720, which remains in force, but it does force the Ministry of Finance to redesign the strict penalty regime, which was originally introduced to dissuade taxpayers from the temptation to hide their assets outside Spain.
The ECJ considers that the obligation to declare assets and rights located abroad (Form 720) is justified because the national authorities have less information available with regard to the assets held abroad by their taxpayers than with regard to the assets located in their territory.
In March of each year, Spanish citizens must file Form 720. For this reason, the government has already started to adapt the rules for this form and the related penalties so that it can come into force before 31 March this year. The changes, which will be introduced once the relevant parliamentary procedures have been completed, mean that the penalty system will be brought into line with the general system and the limitation period will be changed.
With the amendments planned by the Ministry of Finance, the penalties and limitation periods provided for in the General Tax Act will be applied, so that the offence derived from Model 720 will be subject to a four-year limitation period, as is customary for tax offences, and the penalties may not exceed 50% of the amount evaded, this being in line with the general regime of the aforementioned Act.
These changes will affect tax periods that begin on 1 January 2020 and have not yet been completed.
For taxpayers, this means that with the aforementioned ruling, all appeals already initiated against Model 720 penalties will lapse and the tax authorities will be obliged to reimburse the penalties levied and now declared unlawful by the Court of Justice of the European Union. In addition, appeals against sanctions that have already become final will also be possible, as the European Commission’s prior warning of the unlawfulness of the sanction scheme will make it possible to appeal against the state’s financial liability.
In the case of voluntary settlements where the taxpayer has recognised unjustified capital gains without prior warning, resulting from the failure to file Form 720 on time, a request for correction and refund of the wrongly obtained income would only be possible if it corresponds to a non-prescribed financial year (last four years).
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