Since 2012, individuals who are tax resident in Spain (Residentes) have been required to report certain assets held abroad. This reporting obligation is fulfilled by submitting a separate information return, independent of the annual tax return. Failure to comply, where the statutory thresholds are exceeded, may result in substantial financial penalties.

Since 2012, individuals who are tax resident in Spain (Residentes) have been required to report certain assets held abroad. This reporting obligation is fulfilled by submitting a separate information return, independent of the annual tax return. Failure to comply, where the statutory thresholds are exceeded, may result in substantial financial penalties.

To determine whether your stay in Spain qualifies you as a tax resident (Residente) or non-resident (No Residente), please refer to our article: [Differences: Residence, NIE and Residencia]. Whether you are required to file Form 720 depends on several factors, which are explained below.

The reporting obligation generally covers three categories of assets:

1. Foreign bank accounts with a balance exceeding €50,000

For bank accounts, not only the balance as of 31 December of the previous year is relevant, but also the average balance during the fourth quarter must be calculated. If either amount exceeds the €50,000 threshold, this category must be reported. An exception applies to accounts opened and closed within the same tax year before 31 December. Such accounts do not have to be reported because they no longer exist on the reporting date.

It should also be noted that the reporting obligation applies not only to the account holder but also to any authorised signatories. Under Form 720, this category corresponds to Asset Code "C".

2. Securities, shares, investments, company interests, insurance policies or pension rights exceeding €50,000

This category only has to be reported if the combined value of all the assets listed above exceeds €50,000. For example, if you only own a life insurance policy worth €30,000 and shares worth €10,000, this category does not have to be declared. Under Form 720, this category corresponds to Asset Codes "V", "I" and "S".

3. Real estate located abroad or rights over such property exceeding €50,000

In addition to direct ownership of real estate, this category also includes rights in rem over real property, such as purchase options or usufruct rights. When determining whether the reporting threshold has been exceeded, both the acquisition value and the value as of 31 December must be considered. In cases of co-ownership or matrimonial property regimes, the decisive amount is the total value of the property rather than the taxpayer's individual share.

This is particularly important for spouses married under a community property regime, as each spouse must report the full value of the jointly owned property if it exceeds the €50,000 threshold. Under Form 720, this category corresponds to Asset Code "B".

Although each of these three categories constitutes a separate reporting obligation, all of them are declared in a single information return: Form 720. Only those categories exceeding the applicable reporting threshold must be included.

Example: If you are tax resident in Spain, own a property in Germany valued at €65,000 and hold €40,000 in a German bank account, you are only required to report the property, as only that category exceeds the €50,000 threshold.

How, When and Where Must Form 720 Be Filed?

As a general rule, Form 720 must be filed electronically between 1 January and 31 March of the year following the relevant tax year. As mentioned above, all reportable asset categories are included in the same form, meaning that only one information return (Form 720) has to be submitted.

Since the form can only be filed electronically and cannot be submitted in person to the Spanish Tax Agency, a valid digital certificate is required. This should be obtained in advance. Further information can be found in our article: The Digital Certificate.

What About Subsequent Years?

If Form 720 has already been filed in a previous year, a new filing is only required if one of the three reportable asset categories increases in value by more than €20,000 or if a previously non-reportable category exceeds the €50,000 threshold for the first time. A new filing is also required where a previously reported asset or subcategory ceases to exist, for example due to the closure of a bank account, the surrender of an insurance policy or the sale of shares.

Practical Issues: Special Cases

Spouses: Each spouse must report the total value of jointly owned assets whenever the relevant reporting threshold of €50,000 is exceeded. Consequently, where spouses jointly own a property worth €60,000 or a joint bank account with a balance of €70,000, both spouses must report the full value, even though each individual share is below €50,000.

Short-term ownership: Assets acquired and disposed of within the same tax year generally do not have to be reported, since the reporting obligation only applies to assets that still exist on 31 December of the relevant tax year. For example, if you open a bank account in April to distribute an inheritance and close it again in November of the same year, the account does not need to be declared.

Cash, jewellery, vehicles, boats, etc.: As a general rule, these assets are not subject to the reporting obligation under Form 720.

 

Penalties for Non-Compliance: Before and After 2022

Penalties for Non-Compliance: Before and Since 2022

Particular attention should be paid to the exceptionally severe penalties that originally applied to failures to comply with Form 720 reporting obligations. These penalties were significantly higher than those imposed for failing to file an ordinary tax return. As a general rule, failure to file or the incorrect filing of Form 720 resulted in a minimum penalty of €10,000 per asset category (up to €30,000 in total). Even late filings were subject to a minimum penalty of €1,500 per category.

However, these financial penalties were relatively modest compared to the indirect sanction established by Article 39.2 of the Spanish Personal Income Tax Act. Under this provision, any undeclared foreign assets were presumed to constitute unjustified capital gains and were attributed to the oldest tax year that was still open to assessment.

As a consequence, the full value of the undeclared assets could be treated as taxable income in a single tax year. In many cases, this resulted in the application of the highest marginal income tax rate, potentially creating a tax liability of up to 46% of the value of the assets, even though no actual income had been generated.

In addition to this substantial income tax assessment, the Spanish Personal Income Tax Act also established a separate penalty regime for presumed unjustified capital gains.

Under the legislation in force before the reform, this additional penalty amounted to 150% of the total income tax due. Consequently, the combination of the additional income tax assessment and the 150% penalty could, paradoxically, result in the total amount payable to the Spanish Tax Agency exceeding the value of the undeclared assets themselves.

Rebutting the Presumption of Unjustified Capital Gains

The presumption that undeclared foreign assets constitute unjustified capital gains may be rebutted in two situations:

1. The taxpayer can demonstrate that the assets were acquired using income that had already been properly taxed.
2. The taxpayer can prove that the assets were acquired using income earned during tax years in which he or she was not tax resident in Spain.

With regard to late filings, the Spanish General Directorate of Taxes (DGT) changed its administrative position in June 2017. Since then, taxpayers who voluntarily regularise their situation by submitting the corresponding Spanish income tax returns before filing Form 720 may avoid the presumption of unjustified capital gains.

As a result, it is now possible in many cases to submit Form 720 voluntarily, even several years late, without triggering taxation on presumed unjustified capital gains.

The ECJ Judgment of January 2022 and the Current Legal Framework

Due to the increasing exchange of tax and financial information between EU Member States, the disproportionate penalties associated with Form 720 had been widely criticised. In particular, the fact that the penalties were fixed amounts and significantly higher than those applicable to ordinary tax returns raised serious concerns regarding their compatibility with both the Spanish Constitution and European Union law.

In its judgment of 27 January 2022, the Court of Justice of the European Union (CJEU) held that the penalty regime applicable to Form 720 was incompatible with EU law and therefore invalid. The Spanish legislation was subsequently amended at the end of March 2022.

The legislative reform abolished the former penalty regime and also replaced the previous unlimited assessment period with the general four-year statute of limitations applicable under Spanish tax law.

Our law firm will be pleased to analyse your individual situation, carry out the necessary administrative procedures on your behalf and assist you with the preparation and submission of the relevant tax returns. If you require personalised advice or have any questions regarding Form 720 or the reporting of foreign assets, please do not hesitate to contact us by email or telephone.

Author:

Christoph Sander
Lawyer and Tax Advisor
CEO, Partner, Director
info@sspartners.es
Tel: (+34) 951 12 13 06
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