Mallorca Insights

Taxes in Spain - Modelo 720 - Revelation of the world income

Reading time

approx. minutes

Publication date
Category(ies)

In its ruling of January 27, 2022, the Court of Justice of the European Union (CJEU) declared the regulation of the Form 720 penalty system to be contrary to European law.
The high court is of the opinion that the consequences in case of violations are disproportionate to the intended goal of controlling and combating tax fraud. In this issue of our newsletter, we highlight the consequences of this ruling.

The team of Lozano SCHINDHELM in Palma explains what the illegality is about and what taxpayers in Spain must take into account with reference to the Modelo 720 form.

Why does the ECJ classify the regulations as contrary to European law?

Firstly, the lack of a regulation of a limitation period for the realization of unjustified appreciation due to untimely declaration of an asset is absolutely disproportionate, as it is possible for the tax administration to regularize the facts without any time limit.

Second, the 150% penalty on the amount resulting from the capital gain is excessive because, together with the other penalties, it may be higher than the value of the undisclosed assets.

Finally, the rigid penalties for failure to file are disproportionate compared to other fines in the Spanish legal system for similar violations.

In summary, the ruling states that all of this constitutes a disproportionate restriction on the free movement of persons and capital in the internal market and thus a violation of European law.

What are the implications of the ECJ's decision?

The ruling means that all ongoing appeals of Form 720 penalties or income tax assessments for unjustified capital gains will be granted.

It also opens the possibility of a state liability action for sanctions and declarations that have become final.

All those who have voluntarily but belatedly regulated their tax situation can be confident that no penalties will not be imposed for this

Is the filing of Form 720 still mandatory?

Only the penalty regime has been abolished, which is why Form 720 will otherwise remain in force and the deadline for filing the tax return for 2021 remains unchanged at March 31, 2022. In addition, the obligation to report cryptocurrencies will be introduced for the tax year 2021. Since the draft for the introduction of a new Form 721 for the declaration of cryptocurrencies has not yet been adopted, these must be entered in Form 720 if their value exceeds €50,000.

On the other hand, the ruling does not cancel the obligation to report assets and rights located abroad that were acquired in previous tax years, even if they are time-barred. However, based on this ruling, the value of the property cannot be classified as an unjust capital gain and neither the 150% penalty nor the annulled fixed fines can be imposed.

What happens to the sanctions now?

The Ministry of Finance must redesign the sanctions regime to bring it into line with the ECJ's requirements and thus give taxpayers legal certainty. It now remains to be seen whether the new sanctions regime for Form 720 will be designed in line with European law.

For the time being, no penalty regime is in effect, opening a window of opportunity for taxpayers who have not yet declared assets abroad to regularize their situation, i.e., file Form 720 before the new penalty regime is adopted without risking the imposition of penalties.

What courses of action do taxpayers have after the ruling?

In principle, each individual case must be examined. However, taxpayers who have filed an objection to Form 720 or your tax return may request that it be upheld on the basis of the aforementioned ruling.

At the same time, those who have paid a penalty or their tax return and have not appealed may claim compensation within the period specified by law. The time limit is one year from the date of the act triggering the compensation.

Likewise, those who had voluntarily declared an unjustified capital gain in order to avoid a penalty may apply for the correction and refund of the unjustified income for the years for which the statute of limitations has not yet expired. If the self-assessment has already become final through administrative law, the route to be taken is a state liability action.

At Lozano Schindhelm, our staff is available to help you determine whether you are required to file Form 720 for the 2021 tax year based on the forms you have filed to date. We can also help you regularize prior years by filing the appropriate returns and advise you on the appropriateness of requesting a refund of penalties paid both for unlawful income and/or in state liability actions.

The experts at Lozano Schindhelm are always available to answer your tax questions about Form 720.

Lozano Schindhelm SLP
Pere Dezcallar i Net 13
E-07003 Palma de Mallorca / SPAIN
T +34 971 21 32 54
F +34 963 28 77 94
Homepage

Request property details