Historical decision on the Spanish form 720 handed down by the European Court of Justice

Most tax-residents in Spain know or have heard of the Spanish Form 720 regarding the declaration of property outside Spain. A comprehensive disclosure obligation with huge fines for non-compliance, incomplete or late submission, and in recent years it has been a real nightmare for both those who are required to disclose their assets outside Spain and for their respective tax advisers.

On 27 January 2022, the European Court of Justice finally handed down its judgment C-788/19, according to which the Spanish form 720 has been found to be in breach of EU law. The Court has found that it constitutes a restriction on the free movement of capital and is considered disproportionate in three fundamental aspects:

  1. Imprescriptibility. As Form 720 is an informative form where non-reporting has the consequence that assets outside Spain, that have not been reported, are considered an unjustified capital gain to be declared in the most recent non-obsolete income year and as such are added to the taxable ordinary income in this income year, in practice it has been made impossible to invoke statute of limitation period.
  2. Repressive sanctions. Failure to comply with the reporting obligation is considered a very serious tax offense and results in a proportionate fine of 150% of the calculated tax on the value of the unreported assets outside Spain. This fine is considered to be extremely repressive and in addition to the fixed fines for non-reporting, it can in many cases lead to the total amount to be paid by the taxpayer exceeding 100% of the value of the property outside Spain.
  3. Non-proportional fixed fines. As this is an informative report, the amount of the fixed fines is disproportionate to the fines applicable to similar infringements in a purely national context.

Spain is then required to make appropriate amendments to the rules on Form 720.

Should Form 720 continue to be reported?

In this scenario, a number of questions can be asked, including whether there is still an obligation to submit Form 720.

The answer is yes, and the deadline for reporting Form 720 for the year 2021 is March 31, 2022.

It is to be understood that Form 720 will continue to exist, but not the consequences and sanctions now to be amended by Spain.

In the light of the softening of the sanctions system, it is a good time to consider whether it is now that tax residents in Spain should regulate and report information on the part of their wealth outside Spain that has not previously been reported to the Spanish tax authorities.

Compensation for fines paid or tax due to income adjustment?

For those tax residents who have already received a fine or have seen their wealth outside Spain included as an unjustified capital gain in their Spanish income tax return, the ruling has now opened up for compensation.

Each case must be assessed individually

It must be emphasized that there is no single solution or approach, and each case must be analyzed on the basis of the specific circumstances. Although the verdict is clear, Spain is a complex country and it is necessary to consider the procedural steps that can enable compensation.