Introduced in 2012, Modelo 720 requires every Spanish resident to declare all their foreign assets worth over €50,000 (£39,353, $56,762). The penalties for late reporting or failing to report assets are very high, and in some cases, are more than the asset is actually worth.
The tax affects Spain’s sizeable expat population with the country’s finance ministry announcing that there could be approximately 2 million foreign taxpayers with assets overseas who have not submitted a Modelo 720 since 2012.
In November 2015, the Commission opened an investigation against the Modelo 720 reporting measure to determine whether it infringes EU law after a host of complaints from law firms and tax adviser associations in Spain.
On 15 February, the EC announced that Spain has two months to overhaul the Modelo 720 system so that penalties are fairer, slamming the severity with which the tax office punishes late or inaccurate submissions.
If Spanish tax authorities, known as the Hacienda, fail to meet the deadline, the Commission has vowed to take the case to the European Court of Justice.
The EC’s main concerns are that the penalties are “disproportionate” in relation to the non-declaration. Furthermore, as tax is not subject to any statute of limitation – Spanish tax authorities have an unlimited period to pursue the case – could infringe EU law.
Sanctions under Modelo 720 law include, among others, a minimum €10,000 charge on incorrect declarations and an additional 150% penalty on unpaid capital gains.
In some cases, taxpayers have faced large fines for just minor errors or omissions in completing the form.
Two years ago, the Hacienda charged a resident the maximum penalty that can be imposed under the legislation – €439,266 – even though the assets in question were worth €340,000.
While the Spanish government maintains it will defend Modelo 720, sources have hinted at a potential softening of the sanctions, such as capping the fine for errors in completing the form, European advisory firm Blevins Franks wrote on its website last week.
“They also suggested a possible reduction in penalties for failing to declare assets based in EU countries or in states that have signed automatic exchange of information agreements with Spain,” reads the blog post.
“While we need to wait and see how the case unfolds, it is highly likely that the authorities will maintain the Modelo 720 system. After all, it is not the process of declaring overseas assets itself that is under question, but the penalties that are imposed.
“It is possible however, that the Hacienda may revise their approach to reduce the threat of such punishing fines for errors or late submissions,” it added.
continued on the next page