Form 720: The Information Return of assets and rights abroad fails to comply with the principle of free movement of capital

The General Taxation Law requires residents in Spain to file annually an information return on assets and rights abroad (Form 720). The information that has to be provided relates to accounts at financial institutions, securities (shares in entities), life or disability insurance policies, lifelong and temporary annuities, and lastly, real estate assets and rights. Information has to be provided on these assets and rights (their ownership and variations in their value) if they are above certain thresholds, and also on any assets and rights reported in previous years that are retired. There are also specific exceptions, which are defined in the legislation.

Failing to file the return or filing it late with false or inaccurate information may carry two types of consequences:

• On the one hand, "formal" fines (at €5,000 or €100 for each item or set of items of information with a minimum fine set at €10,000 or €1,500), according to whether the return is not filed or is filed incorrectly, or is outside the time limit.
• Elsewhere, the Personal Income Tax Law and Corporate Income Tax Law state that where a return is filed late or not filed at all, the values of the assets and rights must be recognized as a capital gain or unreported income, unless it can be proved that they were acquired with reported income or when the taxable person was not a resident. A fine may also be imposed in these cases, equal to 150% of the tax liability arising from recognizing them as described above.

In November 2015, the European Commission initiated infringement proceedings against Spain (2014/4330) in relation to Form 720, followed by a reasoned opinion in February 2017. Lastly, it brought action with the CJEU in 2019 (case C-788/19), with a petition for the court to declare that Spain had failed to fulfill its obligations in relation to the fundamental freedoms in the Treaty on the Functioning of the European Union and in the European Economic Area Agreement (alert).

In its judgment, the CJEU concluded along the lines put forward by the European Commission and affirmed that Spain has failed to comply with its obligations under the principle of free movement of capital for the following reasons:

1. Because a failure to comply or imperfect or late compliance with the obligation carries liability for tax on the unreported income without the taxable person being able to plead expiry of the obligation.
2. Because it penalizes this behavior with a penalty equal to 150% of the tax liability arising from recognizing that unreported income, which additionally may be added to fixed penalty payments.
3. Lastly, because it penalizes  these failures to comply with unrestricted fixed penalty fines which are not in any proportion to the penalties provided in a purely national context.

To support these conclusions, the CJEU affirmed:

1. That, although the legislation may be justified by the need to guarantee the effectiveness of fiscal supervision and by the objective of preventing tax evasion and avoidance, it goes beyond what is necessary.
2. That the mere fact that a resident has assets or rights in another country cannot give rise to a general presumption of tax evasion and avoidance. Moreover, a provision which presumes the existence of fraudulent behavior on the sole ground that the conditions laid down in that same provision have not been satisfied, without giving any option to rebut that presumption goes beyond what is necessary in order to achieve the stated objective.
3. Additionally, although relying on a statute of limitations with respect to acquisition of the assets or rights is not an obstacle to the possible existence of evasion or avoidance, the principle of legal certainty precludes public authorities from being able to call into question a statute of limitations which has already expired. Whilst the legislature may introduce an extended statute of limitations in certain cases, it is not valid for the tax authorities to be able to act without any time restrictions, especially in relation to a mere failure to comply with a formal or procedural obligation.