In which Autonomous Community should a cash donation to a non-resident in Spain be taxed?
A recent binding ruling by the General Directorate of Taxes has clarified where a cash gift from a parent to a child who is not a resident of Spain should be taxed under the Gift and Inheritance Tax.
Nowadays, this situation is common: Spaniards who have gone abroad to work receive a property as a gift from their parents, or the proceeds from its sale, or inherit it, and because they are working abroad—whether they are residents of the EU or outside it—they are unsure how to file their taxes.
The Case of a Donation to a Nonresident
A married couple residing in Madrid in 2014 sold a property they owned that was located in the Autonomous Community of Castilla-La Mancha.
Less than a year after the sale, the couple wishes to give the money they received from the sale to their daughter.
The daughter does not live in Spain and is not a tax resident of Spain; she is a tax resident of Denmark.
What does the law say?
The LISD, in accordance with the ruling of the CJEU on September 3, 2014, Case C-127/12, provides that in the case of the acquisition of movable property located in Spain through a gift or other legal transactions made without consideration and inter vivos, taxpayers who are not resident in Spain but who are resident in another Member State of the European Union or the European Economic Area are entitled to apply the regulations of the Autonomous Community where the aforementioned property was located for the greater number of days during the immediately preceding five-year period, counted from date to date, ending on the day prior to the tax becoming due (LISD, Additional Provision 2, Section 1, Subparagraph e).
What should you keep in mind?
- The donation is being made by some residents of Madrid.
- The donation is made to a grantee with its tax domicile in Denmark.
- The subject of the donation is a sum of money derived from the sale of a property located in Castilla-La Mancha.
- The sale took place less than a year ago.
But is it necessary for the money to have been in the donors’ possession for a certain number of days within the aforementioned five-year period? Or, conversely, is it not necessary for that period to have elapsed, since the money is considered to have been generated at the time of the sale of the property, and therefore Madrid’s regional regulations apply as of that moment?
What is the DGT’s interpretation?
The DGT interprets that the calculation to determine where a particular movable asset (the money) was located during the five-year period prior to the accrual date is to be applied only when the movable asset has been held for a period of five years or more, and not when it has been held for less than five years.
Since the LISD does not require that property have been held for a specific minimum period for the purposes of applying the aforementioned additional provision, coupled with the fact that not every transfer of personal property is intended solely to obtain a tax advantage.
A practical example
If you live in Spain and want to sell an item and donate the proceeds to your child who lives in Germany in 2016, you’ll need to keep the following in mind:
- If it is real estate, it will be taxed in the autonomous community where the property is located.
- If it is money, one must determine where that cash was generated or the taxable event that generated that income, and it will be taxed in that Autonomous Community.
It is important to know in advance that there are autonomous communities where tax rates are lower than in others.
Currently, in Murcia, there is a 99% reduction in the tax liability for gifts from parents to children and/or spouses or descendants, which makes such gifts advantageous at this time.
Conclusion
When the movable property that is the subject of the donation has been in the donor’s possession for less than five years, the calculation to be performed to determine where the movable property was located for the greater number of days during the period in question—and, therefore, to determine the applicable regulations of the Autonomous Community— with respect to the period referred to in the second additional provision of the LISD, this calculation must be understood to refer to the period during which the donor owned said property (and not to the five-year period).
Therefore, to determine which Autonomous Community regulations apply to the donation of money, we will need to know the period during which the aforementioned asset was in the donor’s possession.
