Article by Leon Fernando Del Canto.

The controversial “Modelo 720” will sound familiar to those who have any connection with Spain. This annual tax return is one of the anti-avoidance tax measures incorporated by the Spanish government, and it is required to disclose any assets owned internationally by Spanish residents to the tax office.

The failure to comply will result in incurring penalties that are considered so unfair that the European Commission (EC) even has an ongoing case against Spain in the EU Court of Justice arguing the disproportionated penalties imposed on taxpayers. The EC began legal proceedings against Spain on 23rd December 2019, claiming that the 720 form penalties infringed the EU regulations as they are disproportionate when compared with the general rules on similar infringements. The Court’s decision is eagerly awaited by Spanish taxpayers who are naturally growing tired of the extreme and draconian measures being imposed by the tax administration.

While completing the form is a tedious process – not least because of how much detail is required regarding one’s overseas assets – it is only Spanish tax residents who have an obligation to file. One issue we see time and again is international Spanish residents who are unaware aware of what being a resident means in the eyes of the tax authorities. Spanish Tax law deems a person resident when any of the following conditions are met:

● Staying in the country for more than 183 days (not necessarily consecutively) between 1st January to 31st December. (Rules such as overnight residency must be taken into account.)

● The main source of their assets and / or economic activity must be based in Spain.

● Their main interests must lie in Spain. This is a rule open to interpretation as there may be grey areas. There are some anti-avoidance provisions, such as when one’s partner and children live there, which must be considered.

Individuals who meet any of the above tax residence conditions are considered to be residents in Spain and therefore must submit the 720 tax form. There is an allowance of 50,000 euros which is calculated before submitting the form, but as rule of thumb, the aggregated value of assets must be considered, which include:

– Real estate and property generally, as well as any profits arising from these.
– Bank accounts, cash and deposits.
– Financial assets, investments, pensions, insurance and other financial instruments.

While it is the taxpayer who directly owns the assets who must submit the tax return, parties who hold any rights over the international assets, such as beneficiaries or those with power of attorney must look into this as well.

The deadline to file the form is the 31st of March of each year, though there is no need to file it annually if the value of the overall assets has not rebased 20,000 euros. The form must be submitted online and a Spanish ID or Resident number identification is required.

The Spanish tax authorities are well known for their voraciousness when it comes to exerting their powers and imposing hefty fines – which can reach 150% of the value of undeclared assets – on those who fail to comply. The main reason argued for such extreme fines is that the failure to submit and fully disclose the information on time constitutes a serious tax evasion offence. This position is not legally sustainable as the tax evasion is a legal determination made by a Court after having heard the arguments of the parties. It is our opinion that the presumption of innocence is not being respected by imposing such hefty penalties.

The “Modelo 720” is a complex form and mistakes can be made all too easily. For example, most people forget that if they are married and own assets jointly, they should both file a form declaring they each own 50% of the assets. It is also worth declaring each and every bank account, even if there are no funds in them.

So what happens if you have a legal requirement to file the form but have failed to do so? Many people come to us with this question. While each case is decided by the courts on an individual basis, we always advise that filing late and incurring a much lower penalty is preferable to risking an inspection and receiving a much heftier fine.

There are considerations to be made before submitting a belated 720 tax form, because you do run the risk of a tax inspector coming knocking at your door, so preparing for a tax inspection is very important. This requires reviewing all your assets and ensuring that all records and returns from the past four years are in order.

Due to the Spanish tax office’s ferocious nature, it is always recommended that you discuss your issue with an experienced tax lawyer who will guide you through how to avoid a tedious legal process which could take years to conclude and could mean incurring considerable legal costs.

Leon Fernando Del Canto is an international tax barrister practising from Normanton Chambers in London. He is a member of the Honourable Society of Lincoln’s Inn, The Worshipful Company of Tax Advisers, the Association of Taxation Technicians and the Madrid Bar.