Who hasn't dreamt of enjoying retirement under the warm
Spanish sun? Many fulfill this dream by acquiring a second home in
Spain. While the focus of this step often lies solely on enjoying
sunny days, it is also important to consider the settlement of an
estate when the owner passes away, both legally and fiscally.
Our specialists Carlos Vázquez and Branko Reumkens
have published a comprehensive guide in the professional journal
Grensoverschrijdend, regarding the European regulation on
succession and its important impact on cross-border succession.
This regulation simplifies the settlement of successions within the
EU and ensures a streamlined and uniform process.
The European Succession Regulation (Regulation (EU) No 650/2012)
The European Succession Regulation (Regulation EU No. 650/2012), which came into effect on August 17, 2015, has had significant implications for succession within the European Union. In the preamble of this regulation, the European legislator speaks clearly:
- (7) The proper functioning of the internal market should be facilitated by removing obstacles to the free movement of persons who currently face difficulties in asserting their rights in the context of a succession having cross-border implications. In the European area of justice, citizens must be able to organize their succession in advance. The rights of heirs and legatees, other persons close to the deceased, and creditors of the estate must be effectively guaranteed.
- (8) In order to achieve these objectives, this Regulation should combine provisions on jurisdiction, on applicable law, on recognition—or, as the case may be, acceptance—enforceability, and execution of decisions, authentic instruments, and judicial settlements, and on the creation of a European Certificate of Succession..
Article 20 of the European Inheritance Regulation (Universal Application) indeed establishes a clear guideline for the application of inheritance and succession law; the principle of universal application. One law applies to the entire estate, regardless of where the assets are located. This marks a significant change from the past, where many countries applied their own inheritance and succession rules based on private international law, depending on where the assets were located. This often resulted in complex situations with multiple national inheritance systems, which frequently brought additional problems and costs for those involved. The European legislator aimed to reduce this fragmentation and complexity, making the process of settling an estate within the EU simpler and more uniform.
Two Wills for an estate?
It is still common practice for Spanish notaries and lawyers to advise creating separate wills for assets in different countries, for example, one for Dutch assets and one for Spanish assets. These Spanish wills often state that Spanish inheritance law applies to the assets located in Spain.
However, as described earlier and as the European legislator clearly intended, this practice is not in line with the European Succession Regulation. According to this regulation, one will should be sufficient, establishing the applicable inheritance law for the entire estate, regardless of where the assets are located.
Applicable Law succession and settlement?
The fundamental principle of the regulation is that the applicable inheritance and succession law is determined based on the habitual residence of the deceased at the time of death. However, the regulation also provides the option to choose the law of the state of nationality of the deceased.
The choice of law can be made for both the inheritance of the estate and the applicable law for its settlement. This includes issues such as the transfer of ownership to heirs, the powers of executors, liability for debts of the estate, and the distribution of the estate.
Habitual Residence – close and stable connection
A crucial concept in the European Succession Regulation is the habitual residence of the deceased. This is considered the general point of reference for determining both jurisdiction and applicable law. Determining the habitual residence can, however, be complex and is not limited to merely the address where someone lives.
The regulation emphasizes that the habitual residence should indicate a close and stable connection with the relevant state. This involves an assessment of all aspects of the deceased's life in the years before their death and at the time of death. Criteria such as the duration and regularity of stay, social and family ties, and economic activities play a role.
In some cases, such as when the deceased lived or traveled in different member states, determining the habitual residence can be particularly complex. Factors such as professional or economic reasons for staying in another member state, while maintaining close ties with the country of origin, must be considered. Additionally, other circumstances, such as nationality and the location of main assets, can influence the assessment of habitual residence. The regulation stresses the importance of a thorough analysis of all relevant factual circumstances.
Advice for Dutch Retirees on habitual residence
For retirees, it is indeed crucial to consider the complex situation regarding the application of inheritance and succession law in different countries, especially when they reside in Spain for an extended period. Determining the habitual residence can be crucial for establishing which law applies to their estate upon death. To determine the habitual residence, the well-known fiscal criterion of 183 days is used. If someone stays in Spain for more than 183 days a year, it is likely that the habitual residence is there. This can then affect which law applies to the estate.
For Dutch retirees, there is fortunately an important option to avoid ambiguity. They can choose to make a Dutch will, explicitly choosing Dutch law. This ensures that Dutch inheritance law applies to the entire estate, including the second home in Spain. This strategy can help avoid potential disputes and uncertainties upon death and provides a clear legal basis for the (civil) settlement of the estate.
Inheritance Tax
A common misconception is the assumption of having a choice regarding applicable inheritance tax on the estate (assets and liabilities). This is (unfortunately) not the case. The main rule is that the country of residence is authorized to levy inheritance tax on the entire (world) estate.
This is illustrated by Article 1 of the Dutch Law on Succession 1956, which states:
Under this Act, the following taxes are levied:
- Inheritance tax on the value of all that is acquired by virtue of inheritance through the death of a person who at the time of death resided in the Netherlands;
- Gift tax on the value of all that is acquired by virtue of a gift from a person residing in the Netherlands at the time of the gift.
Moreover, many countries will levy inheritance tax as soon as there is real estate in that specific country. Spain levies inheritance tax on the assets in Spain, even if the owner is not a resident of Spain. This Spanish (taxable) estate includes, among other things, a Spanish house including furnishings, funds in Spanish banks, and shares in Spanish companies.
Specific rules Communidades Autónomas
In the domain of inheritance and gift tax, the Communidades Autónomas have the authority to deviate from the exemptions and rates established by the national government. Each Communidad Autónoma in Spain can apply its own rules regarding the taxation of gifts and inheritances. Previously, Spain distinguished between resident and non-resident heirs, with resident heirs being liable for less tax. This system, however, has been outdated since January 1, 2015.
There are significant differences between the various Communidades. In some cases, inheritance tax is due, while in other Communidades this is not the case. The Spanish province of Andalusia, for example, was known for its high inheritance tax, but in January 2019 the new government of Andalusia agreed to changes in the inheritance tax legislation, which almost eliminated it.
Taxation real estate outside of country of residence
Taxation by the country of residence of the deceased occurs on the worldwide estate. As described above, this can result in double taxation. This is particularly relevant when the country where the deceased did not reside levies tax due to real estate in that country. The Dutch legislator has taken such situations into account and aims to prevent double taxation. This is achieved through the conclusion of tax treaties (bilateral arrangement) and through the Decree avoidance double taxation 2001.
The Decree avoidance double taxation 2001 is a unilateral Dutch arrangement that aims to prevent individuals residing or established in the Netherlands from being taxed twice on the same income or assets, both in the Netherlands and another country. If the the Decree avoidance double taxation 2001 applies, the Netherlands grants a reduction of the tax due in the Netherlands under certain circumstances. The reduction can be in the form of a so-called tax exemption (an exemption from Dutch tax for the non-Dutch tax on the non-Dutch part of the income) or a so-called tax credit (a reduction of the Dutch tax by the amount of the foreign tax paid). The application of the 2001 Decision to Prevent Double Taxation generally only arises if no tax treaty applies.
The Dutch 10-Year Fiction – Dutch taxes succession and gifts
As previously indicated, in the event of death, the residence of the deceased at the time of death is relevant for Dutch inheritance tax. However, this residence concept is fictitiously extended for a period of 10 years for those with Dutch nationality who die or donate within this 10-year period: they are then deemed to have resided in the Netherlands at the time of death or donation. For individuals with a nationality other than Dutch, a period of 1 year applies only regarding gifts.
This arrangement is included in Article 3 of the Dutch Law on succession, which reads as follows:
- A Dutch person who has resided in the Netherlands and dies or makes a gift within ten years after leaving the Netherlands as his habitual residence shall be deemed to have resided in the Netherlands at the time of his death or gift.
- Notwithstanding the provisions of paragraph 1, anyone who has resided in the Netherlands and gives a gift within one year after leaving the Netherlands as his habitual residence shall be deemed to have resided in the Netherlands at the time of making the gift.
In practice, we often see that foreign professionals do not consider this issue in their advice. They base their conclusions on their own national tax system and often conclude that no tax is due from their national perspective. However, the Dutch taks authorities reserve the right to levy taxes up to 10 years after emigration. Therefore, caution is advised in such situations.
Spanish Plusvalía – capital gains tax in Spain
When selling real estate in Spain, capital gains tax (Ganancia patrimonial, also known as Plusvalía fiscal) is due. This tax is levied on the profit made from the sale of the property and is paid directly to the state. However, upon the transfer of real estate due to inheritance, no Plusvalía is due (the so-called Plusvalía del muerto). The conclusion is therefore that no tax needs to be paid on the capital gain upon death, regardless of how substantial this gain may be.
In practice, we sometimes notice that after a death, no notification is made to the Spanish tax authorities. Clients are often afraid that this will result in additional inheritance tax that needs to be paid. A common belief is that this will be resolved later or that it will expire. However, this can be a costly mistake. It is possible that upon death, the market value of the property will be reassessed, for example through an appraisal.
Depending on the region (Communidad Autónoma), this can lead to additional tax. After all, the reassessment of the property will lead to a larger estate. Nevertheless, in many comunidades lately, little inheritance tax is due.
The advantage of this declaration and revaluation (which must be submitted within 6 months of death) is that in a later sale by, for example, the heirs, there will be less tax regarding Plusvalía fiscal. However, this is still relatively unknown and therefore not well known.
Conclusion
In short, there are many uncertainties and things are often not well regulated. Fortunately, there are many options to ensure that a Spanish dream does not turn into a nightmare. For personalized advice and assistance with your property purchase in Spain, contact LexQuire today. Our team of international legal experts is here to help you every step of the way.
This translation captures the detailed content and legal specifics of the original article, maintaining the integrity and informative nature of the original Dutch text. Download the full PDF (in Dutch) here.
For more information on inheritance law, you can read our extensive blog series on Dutch-German cross-border inheritance issues. Our team at LexQuire is ready to support you every step of the way.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.