A recent Judgment of 28 July, handed down by the Administrative Chamber of the National Court (Audiencia Nacional), marks a significant step in the tax treatment of non-European Union residents in Spain.
Equal Terms for Non-Resident Income Tax (IRNR)
The National Court recognised the right of a non-EU citizen to deduct expenses arising from rental income generated in Spain for Non-Resident Income Tax (IRNR) purposes. This decision means that non-EU residents may now deduct these expenses on the same terms as residents of the European Union or the European Economic Area.
The Court upheld the appeal and ruled that Article 24.6 of the IRNR Law must be interpreted in accordance with European law, extending its scope to third-country residents. The ruling prohibits less favourable tax treatment based on residence, considering it a restriction on the free movement of capital. This judgment marks a further step in aligning Spanish legislation with EU rules, as interpreted by the CJEU.
The Origin of the Dispute
The dispute arose from a claim by a United States resident against the TEAC’s ruling, which had confirmed the Spanish Tax Agency’s refusal to allow the deduction of such expenses. The claimant argued that the free movement of capital established in Article 63 TFEU also protects third-country residents, in accordance with the case law of the CJEU. They also invoked Article 25 of the Double Taxation Agreement between Spain and the United States, which prohibits discrimination between nationals of both States.
Key Implications
While the judgment is a vital development, it is important to note two major implications:
- It is not final: The State Attorney’s Office may lodge an appeal before the Supreme Court (Art. 85 LJCA).
- Potential Refunds: If the judgment is confirmed, it would pave the way for non-EU nationals to claim refunds of Non-Resident Income Tax (IRNR) for fiscal years not yet time-barred.
The Political Context: Proposed State Supplementary Tax
The timing of the National Court’s ruling is significant. On 22 May, the governing socialist party introduced a bill that included the creation of a State Supplementary Tax on the Transfer of Real Estate to Non-EU residents. This proposal seeks to increase the cost of acquiring property for foreign residents outside the EU by imposing a 100% surcharge on the purchase price. This tax would apply solely to the resale property market, excluding first transfers subject to VAT.
In light of the National Court’s reasoning and the CJEU’s interpretation of the free movement of capital, such a measure is considered incompatible with EU law. It constitutes fiscal discrimination against non-EU residents. Furthermore, it also raises serious constitutional concerns given its confiscatory effect.
