Op-Ed: “Fines for not providing information on assets held abroad and the freedom of movement of capital” by Darya Budova
On 15 July 2021 Advocate General Saugmandsgaard Øe delivered his Opinion in a case concerning the Spanish declaration on assets held abroad, Commission v Spain (C-788/19), further to an infringement procedure initiated by the European Commission.
The obligation to submit the declaration under discussion was imposed back in 2012, along with the so-called tax amnesty passed the year before. These two measures were conceived as a pack. Spanish tax residents could disclose non-declared income (typically held abroad) without any penalty applying. At the same time, the obligation to declare assets held abroad was introduced and failure to comply with it was (and still is) subject to severe penalties.
The declaration (also known as a Form 720) includes bank accounts, shares, certain insurance coverage and immovable property, provided each of these groups of assets is worth over 50,000 euros. After the first declaration (in 2012 or when a person became tax resident) subsequent declarations have to be filed if the value of the assets increased over 20,000 euros, or sales and purchases took place. The failure to submit this declaration or submitting it incorrectly or late, opened the door to the set of measures that made holding undeclared assets abroad a risky business.
Firstly, the undeclared assets − if and when discovered − would be considered undeclared income of the latest tax year that is not time-barred. For instance, if a 100,000 euro-apartment abroad was to be discovered today, the 100,000 euros would be included as non-justified income in the Personal Income Tax declaration of 2017, with an approximate tax quota of 50,000 euros. This applies unless the taxpayer could prove that the assets (the apartment) were bought before he or she became tax resident in Spain, or it was bought with funds already declared to the tax authorities. It should be observed that in Spain, for assets falling outside of the scope of Form 720, the taxpayer could also prove that he or she already owned the assets in a time-barred year and no tax would be payable for the asset itself − ordinary income notwithstanding.
Secondly, a fine of 150% of the resulting tax quota is applicable. So, following the apartment example, this would lead to an additional amount of 75,000 euros in fines (150% x 50,000 tax quota). The risky business is that the taxpayer could be asked for 125,000 euros in tax and fines for a 100,000 euro-apartment.
Thirdly, where the declaration is filed late or is incomplete or incorrect, specific fixed fines apply. If the mistake is caught by the tax administration, the fines amount to 5,000 euros for data or sets of data (an interesting question is what is a data or set of data in this declaration?), with a minimum of 10,000 euros. If the taxpayer corrected the mistakes voluntarily, the fines for data or sets of data declared incorrectly are 100 euros, with a minimum of 1,500 euros.
In practice, these measures had a positive effect on disclosing undeclared assets, no doubt. But they also made the common Spanish taxpayers’ life quite complicated. The submission of this declaration is to be made electronically only, under a tight deadline and long before ordinary declarations are submitted and with high compliance costs, while the same information is declared in other formats for other taxes. This is not to mention that in many situations punishment is not meant to be pursued – such as simply forgetting or not knowing.
In this case the Commission challenged the three sanctioning measures: the inclusion of the undeclared assets independently of whether the acquisition of such assets is time-barred, the 150% penalties and the fixed fines for declarations submitted late or incorrectly. The Commission’s infringement case is based on the infringement of Articles 21 (citizens), 45 (workers), 49 (establishment), 56 (services) and 63 (capital) of the Treaty and the respective Articles 28, 31, 36 and 40 of the EEA Agreement.
The Advocate General centres his analysis on the freedom of movement of capital. He considers that, no doubt, the rules under discussions constitute a restriction to this freedom. And the fact that this legislation is sought to fight tax fraud does not exclude it from being such a restriction. The question is whether the restriction is justified, the central issue of the case being whether these rules are proportionate.
The Advocate General concludes that sanctioning measures associated with Form 720 are disproportionate and thus constitute an unjustified restriction to the free movement of capital to the extent they: (i) deny the possibility to invoke time-bar for the newly opened bank accounts − not so for the other assets; (ii) impose 150% penalties for not declaring the latter kind of assets; and (iii) impose fixed fines for incorrect or incomplete declarations, for all kinds of assets.
The first conclusion is drawn from the very fact that bank accounts opened in 2016 and onwards are subject to automatic exchange of information previously provided by financial institutions under Directive 2011/16. The other kind of asset (bank accounts already existing, shares, insurance or immovable property) is exchanged under that Directive provided the information is available to the Member State. Therefore, the Advocate General considers, the information is not easily available to the Spanish authorities and that is what justifies a longer time-limit. He refers to the case law of the Court that allowed Member States to introduce a longer recovery period where the assets or income is concealed from the tax authorities (Halley, C‑132/10). This point of reasoning has already become the centre of the controversy, for several reasons. Firstly, because while the Court has indeed admitted longer time-limits for recovery, it never did so with the total absence thereof. Such a measure seems to conflict with legal certainty − strongly defended by the Court − and definitely seems disproportionate. Secondly, this lack of proportionality does not seem to be justified by the fact that the bank information is provided by the banks and exchanged automatically only for certain accounts. This of course eases access to information, but other mechanisms exist and existed already before 2016 for other assets. The Advocate General himself mentions that the effectiveness of the mechanisms of exchange of information cannot be invoked against the taxpayers and even states that it is hard to believe that other Member States would not have information on immovable property, for instance, but ultimately rests on the fact that the Commission did not provide enough evidence of the infringements.
Further, the Advocate General also considers that the 150% fine is disproportionate in the case where the income was attributed without taking into consideration the time-bar for newly opened bank accounts. Not so for the rest of the assets, where we are dealing with the fight against tax fraud – and not so much with formal obligations – and the measure is justified. Or, more precisely, the Commission did not justify otherwise.
Lastly, the Advocate General considers that the fixed fines are highly disproportionate, for all of the types of assets concerned, compared to other similar fines established for Spanish internal situations.
This Opinion provides a detailed study of the provisions at stake but it rests mainly on the fact that the Commission did not provide enough evidence of the infringement. The distinction between the newly opened bank accounts and the rest of the assets is, of course, what poses the major question. But in practice, the obstacle of the declaration of assets abroad and the sanctioning regime is equally limiting to the cross border investment for newly opened bank accounts and any other asset. Should the Court follow the Opinion strictly, it would be leaving the door open to new claims. In any event, it will still have room to further reflect on the penalties associated with the Form 720 in another case referred to the Court (TEAR de Cataluña, C-330/20). In the latter case, the High Court of Justice, Catalonia (Tribunal Superior de Justicia de Cataluña) questions whether going beyond time-bar in the way the Form 720 regulations do is compatible with the free movement of capital and also poses certain procedural questions.
Darya Budova is a Senior Associate at an international law firm, specialised in VAT and customs law.