Europe abolishes the modelo 720, one of the most controversial declarations in Spain

The Court of Justice of the European Union (CJEU) has finally ruled on the famous modelo 720, a financial declaration to be made by taxpayers who have assets abroad, such as accounts, real estate, or securities. And, to the relief of those affected, it has ruled in their favour, considering it to be contrary to EU law. This declaration has been highly controversial since it was introduced by Mariano Rajoy's government in 2012 because the penalties for not filing it could sometimes be higher than the value of the assets held abroad.

The CJEU has judged two penalties imposed on taxpayers who did not file the modelo 720, or who did so after the deadline. Specifically, the judgement relates to penalties of 100 euros per item of information, with a maximum of 1,500 euros if the declaration is filed late but without prior notice. However this penalty can go up to 5,000 euros per item of information, with a minimum of 10,000 euros if it is filed after the Tax Administration requests it.

Nor do the penalties end there. José María Salcedo, partner at Ático Jurídico, points out that there is another block of penalties in the modelo 720 consisting of charging on the taxpayer's income tax an unjustified increase in wealth for the amount of the undeclared assets. And to this is added a penalty of 150% of the amount resulting from this charge. Therefore, the amount of the penalties may end up exceeding the value of the undeclared assets and rights abroad.

The reasons for the CJEU's judgement

The CJEU considers that these penalties related to the modelo 720 are disproportionate in relation to the objectives pursued by the Spanish legislation, which are to ensure the effectiveness of tax controls and to combat tax fraud and tax evasion. That is the purpose of modelo 720 declaration.

Moreover, the CJEU considers that Spain has failed to fulfil its obligations under the principle of free movement of capital. The obligation to file the modelo 720 and the penalties for failure to comply or for imperfect or late compliance with that obligation, which have no equivalent in respect to assets situated in Spain, establish a difference in treatment between residents of Spain depending on the place where their assets are located. That obligation is liable to deter residents of that Member State from investing in other Member States, to prevent them from doing so, or to limit their opportunities to do so, and thus constitutes a restriction on the free movement of capital.

Specifically, the CJEU considers that Spain has failed to fulfil several obligations:

• The obligations incumbent on it by virtue of the free movement of capital by providing that non-compliance or imperfect or untimely compliance with the reporting obligation relating to assets and rights located abroad results in the taxation of undeclared income corresponding to the value of those assets as "unjustified capital gains" in their personal income tax, without the possibility, in practice, of invoking the statute of limitations. In other words, the Spanish legislation produces an effect of imprescriptibility.
• Spain has failed to fulfil its obligation under the free movement of capital by imposing a penalty of a proportional fine of 150 % of the tax calculated on the amounts corresponding to the value of the assets held abroad for non-compliance, imperfect compliance, or late compliance with the obligation to provide information on assets and rights held abroad. This fine may be cumulated with fixed fines. The CJEU states that it is repressive in nature and that it may lead, in many cases, to the total amount of the amounts owed by the taxpayer exceeding 100% of the value of his property or rights abroad. This constitutes a disproportionate impairment of the free movement of capital.
• Spain has infringed the free movement of capital by penalising non-compliance or imperfect or late compliance with the obligation to provide information on assets situated abroad with fixed fines, the amount of which is out of all proportion to the penalties laid down for similar infringements in a purely domestic context and the total amount of which is not limited. The amount of these fines is EUR 5,000 for each omitted, incomplete, inaccurate or false item of information or set of data, with a minimum of EUR 10,000, and EUR 100 for each item of information or set of data declared after the deadline or not declared by electronic, computerised, or telematic means where there was an obligation to do so, with a minimum of EUR 1,500.

How to recover what has been paid

The ruling of the CJEU will mean that the appeals which are currently pending, filed against the penalties from the modelo 720, or against the settlements resulting from charging an unjustified increase in wealth in the personal income tax of the taxpayer, will be upheld. Thus, the Treasury may be faced with million euro refunds in the event that taxpayers have paid the amount of the penalties or settlements.

In addition, lawyer José María Salcedo clarifies what happens with settlements and penalties that are already final and unassailable. In this case, there are two ways for affected taxpayers to recover what they have paid.

Full nullity

The partner of Ático Jurídico notes that if the penalties associated with the failure to file the modelo 720 are already final, the taxpayer must challenge them by means of one of the special review procedures provided for in article 216 of the General Tax Law (LGT). The most common is the nullity procedure provided for in Article 217 of the LGT.  And the Supreme Court, in its 16-7-2020 ruling, has looked favourably on this procedure, in cases of infringements of EU Law, making it a suitable way of recovering what has been unduly paid.

Financial liability of the State Legislator

Another avenue available to taxpayers is the State's financial liability for having approved a punitive regulation that has finally been declared illegal by the European Union. However, this is a very restrictive procedure that imposes demanding requirements:

• Taxpayers are required to have appealed against the administrative action that caused the damage (settlement or penalty), obtaining a final judgment rejecting the appeal. In addition, in that appeal the taxpayer must have invoked the infringement of EU law subsequently recognised by the CJEU.
• Moreover, the State Legislator's financial liability requires that the purpose of the rule declared unlawful is to confer rights on individuals, and this could also be an obstacle to this route.

However, the partner of Ático Jurídico points out that Spain's system of financial liability is currently being judged by the CJEU itself because it could violate the "principle of effectiveness", i.e. in practice it is very difficult for the citizen to obtain compensation even though it is intended to repair the consequences of the damage caused.

Lastly, taxpayers who voluntarily regularised their tax situation, by charging an unjustified increase in wealth to their personal income tax in the oldest of the non-prescribed tax years, can now request the rectification of this complementary tax return and a refund of the undue payment. This, provided that no more than four years have elapsed. 

What the ruling against the 720 tax form means

The Court of Justice of the European Union declared that:

• The modelo 720 is unlawful because failure or late compliance with the filing of the modelo 720 results in the taxation of undeclared income corresponding to the value of those assets as "unjustified capital gains" without the possibility, in practice, of relying on the statute of limitations.
• The modelo 720 is illegal because it penalises non-compliance or late filing of the modelo 720 with a proportional fine of 150% of the tax calculated on the amounts corresponding to the value of those assets or rights, which can be accumulated with fixed fines.
• The modelo 720 is unlawful in that it imposes fixed fines, the amount of which is disproportionate to the penalties provided for similar infringements in a purely national context and the total amount of which is not limited.

Europe has therefore ordered Spain to pay the costs.

What taxpayers must do from now on

The Minister of Finance and Public Function, María Jesús Montero, has announced that the elements subject to revision of the modelo 720 will be corrected "as quickly as possible". However, she stressed that taxpayers have until 31 March this year to file the modelo 720. In total, there are around 60,000 taxpayers who file this declaration annually and the amount declared since the declaration has been in force (2012) is around 225 billion euros. 

"We are going to reformulate quickly, once we read the small print carefully, those aspects that need to be corrected," the minister assured. Specifically, the issues that are subject to review are the statute of limitations and the amount of penalties. To this end, she assured that it is more likely that the law will be corrected using laws already being processed in Congress and the Senate, instead of using a decree law. 

Who is obliged to file the modelo 720?

The modelo 720 must be filed by taxpayers living in Spain who have accounts in financial institutions located abroad, as well as for securities, insurance, and income deposited, managed, or obtained abroad, and for real estate located abroad and rights over the same.