Direct taxation: Commission decides to refer Spain to the Court of Justice over two tax provisions
European Commission - IP/06/43 16/01/2006
Brussels, 16 January 2006
The European Commission has decided to refer Spain to the Court of Justice over its taxation of non-residents' capital gains realised on the sale of Spanish immovable property. Under Spanish law, capital gains of resident individuals derived from immovable property are taxed at a rate of 15%, whereas similar capital gains of non-resident individuals are taxed at a rate of 35%. The Commission has also decided to refer Spain to the Court of Justice over its taxation of non-residents' employment-related income. Under Spanish law employment related income is generally subject to a final withholding tax at a rate of 25% when it is paid to non-resident individuals whereas for resident individuals it is taxed according to a progressive scale. The Commission considers that Spanish tax legislation in these two areas fails to conform to the EC Treaty requirements, in particular to the non-discrimination principle. Spain has not changed its legislation despite the Commission's formal request of July 2005 (IP/05/933).
Employment income of non-residents
Spanish tax legislation subjects resident individuals to progressive taxation on their employment-related income while applying a flat tax rate of 25% to the Spanish income from employment of non-resident individuals (with exceptions for pensions and income of non-resident short term employees). As a result, non-residents are subject to a higher tax burden than resident individuals, because the latter are subject to progressive rates of taxation ranging from 15% to 45%. The difference in treatment is most significant in the case of taxpayers receiving a comparatively low income, such as trainees.
The Commission considers that the Spanish tax legislation fails to conform to the EC Treaty requirements, in particular to the non-discrimination principle. The higher tax burden on non-residents also makes it less attractive for Spanish employers to recruit labour from other Member States rather than from Spain and thus represents an obstacle to the free movement of workers.
Capital gains of non-residents
Under Spanish legislation capital gains of non-resident individuals are taxed at a flat rate of 35%, whereas residents are subject to progressive taxation when the fixed assets remain within the possession of the taxpayer for less than one year, and to a flat rate of 15% when the assets are realised after one year of possession. Thus, non-resident individuals are always subject to a higher tax burden if they sell their property after one year of possession, and are so in most cases, if the property is sold within the year after acquisition.
The Commission considers that the Spanish tax legislation fails to conform to the freedom of capital movement enshrined Article in the EC Treaty together with the non-discrimination principle.
The European Court of Justice has clearly established in its rulings that it
is contrary to EU law (to the rules on free movement of persons and free
movement of capital) to tax residents and non-residents differently, if there is
no objective difference between the situation of the two to justify the
difference in treatment . Moreover, in Case C-234/01 (Gerritse), the Court also
made it clear that it is only permissible to apply a flat and definitive tax
rate to a non-resident if that rate is not higher than that which would be
applied to that person under the progressive table, applied to the net income
increased by the personal basic tax-free allowance which is applied to
The Commission considers that the difference in tax treatment of the two categories of taxpayers constitutes indirect discrimination on the grounds of nationality prohibited by the Treaty.