Model 720: Declaration of illegality limited to its sanction regime

The Court of Justice of the European Union (CJEU) has declared the regulation of the penalty regime of model 720 to be contrary to EU law.

The High Court considers that the consequences of not complying are totally disproportionate in relation to the pursued objective of controlling and combating tax fraud. The judgment lists the following reasons:

1. Firstly, the lack of a statute of limitation period for unjustified capital gains due to the failure to declare an asset in due time is absolutely disproportionate, given that it the tax authorities are allowed to regularise without any time limit.
2. Secondly, that the 150% rate of the penalty on the amount resulting from the capital gain is excessive, given that, when added to the other penalties, it can be higher than the value of the assets not declared.
3. And, finally, because the fixed penalties for failure to file are disproportionate to other fines in the Spanish legal system for similar non-compliance.

In summary, it is stated that all this represents an disproportionate restriction on the free movement of persons and capital within the European single market.

The ruling constitutes a setback for the Spanish Treasury, since, on the one hand, it will mean that all ongoing appeals against penalties under the 720 model or personal income tax settlements for unjustified capital gains will be upheld. On the other hand, it opens up the possibility of claiming the State's patrimonial liability for those penalties and declarations that have become final.

In addition, all those who have regularised their situation voluntarily but extemporaneously can be confident that such sanctions will not be imposed.

Therefore, the Ministry of Treasury has already confirmed that it will review the penalty regime in order to adapt it and thus provide legal certainty to taxpayers. It now remains to be verified whether the new penalty regime for Form 720 will comply with the criteria laid down by the CJEU. Our prognosis is not favourable.

From Lozano Schindhelm we would like to remind you that form 720 is still in force and that the deadline for filing the tax for the financial year 2021 has not changed and ends on 31.03.2022. We also recommend taxpayers who have lodged an appeal against form 720 or income tax settlement to request that it be upheld on the basis of the aforementioned ruling. For those who have paid the penalty or settlement and have not appealed it, we advise to claim it within the legally established period (1 year from the date of the act giving rise to the compensation).

Autor: Fernando Lozano
Autor: Claudia Cascant