- The Court finds the consequences of not declaring, or declaring late, assets abroad to be disproportionate.
- What is not challenged is the duty to report: Modelo 720 remains due every year.
- Anyone with open proceedings or past penalties should review their case with an adviser.
On 27 January 2022 the Court of Justice of the European Union (CJEU) gave judgment in case C-788/19, Commission v Spain, on Modelo 720, the reporting return for assets and rights held abroad. The Court upheld the European Commission’s action, finding that the rules on the consequences of failing to comply with that obligation unjustifiably restrict the free movement of capital.
The ruling declares three elements contrary to EU law: the treatment of undeclared assets as unjustified capital gains, the proportional fine of 150% of their value and the fixed penalties for each item omitted. For taxpayers with accounts, property or investments outside Spain it is far-reaching news, although how it will be applied in practice remains to be clarified.
What Modelo 720 is
Modelo 720 was created in 2012 together with other tax control measures. It requires Spanish tax residents to report accounts, securities and property held abroad when the total in each category exceeds €50,000. It is filed every year, in the first months, and it is an information return: no tax is paid by filing it.
What made it exceptional was its regime of consequences. Failing to file, filing late or filing incompletely could lead to fixed penalties for each item, a fine of 150% of the value of the assets and the treatment of those assets as unjustified capital gains, with no limitation period. It was a much harsher package than the one applied to other tax infringements. One relevant consequence is that many assessments and penalties based on those rules could be open to review, although each case depends on its procedural stage and on time limits.
What the Court decided
The CJEU considers that the system breaches the free movement of capital for three main reasons. The first is the absence of any limitation period: it allowed regularisation without time limit and the reopening of periods that had already expired. The second is disproportion: a 150% fine exceeds the value of the assets themselves, and the fixed penalties had no ceiling. The third is the potentially confiscatory nature of the whole.
The Court does not, however, challenge the obligation to report assets abroad or the regulation approving the form. The Commission had opened infringement proceedings in 2015, issued its opinion in 2017 and brought the case to the Court in October 2019. The ruling ends that process, although it does not automatically resolve individual cases still pending. That regulation coexisted for years with a debate over its proportionality, and the ruling settles it against Spain.
Effects and what to review
Spain must comply with the ruling, and the tax authority and the courts should stop applying the rules declared contrary to EU law. Taxpayers can invoke it in pending administrative and judicial proceedings. Situations that have already become final raise more doubts, and the route of State liability is complex. The usual course will be to await the legislative reform the government has announced.
In the meantime, prudence suggests continuing to file the form: the obligation remains in force and the deadline for 2021 ends on 31 March. Anyone with appealed penalties, assessments for unjustified gains or past regularisations should review with their adviser what stage they are at, which deadlines remain open and what arguments the ruling now provides. It is worth keeping the documentation on the assets and on past returns, because it will be the basis of any future claim.
The ruling removes the harshest consequences of non-compliance, but not the obligation to declare.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
