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JUDGMENTS ON THE LIMIT ON INCOME TAX ON WEALTH: STS 4849/2025 ECLI:ES:TS:2025:4849; STS 4846/2025 ECLI:ES:TS:2025:4846

On February 1, 2023, and June 28, 2023, the High Court of Justice of the Balearic Islands issued two rulings recognizing the same taxpayer (Mr. Adriano) as having the right to apply the limit established in Article 31.1 of the Wealth Tax Law and being entitled to a refund of any overpayments.

The State Attorney argues that taxpayers subject to the Wealth Tax under the real obligation, that is, non-residents, are not entitled to apply the income-wealth limit provided for in Article 31.1 of the Wealth Tax Law. This limit, which sets the combined limit between Personal Income Tax and Wealth Tax at 60% of the Personal Income Tax base, is justified by the complementary nature of both taxes and by the need to respect the constitutional principles of progressivity and non-confiscation enshrined in Article 31 of the Spanish Constitution.

Consequently, the State Attorney argues that a non-resident cannot benefit from this limit, given that the complementarity between the two taxes does not apply to their situation. Since they are not habitually resident in Spain, the taxpayer does not pay Personal Income Tax (IRPF) in Spain and, therefore, is not affected by the interaction between IRPF and Wealth Tax. According to the State Attorney, applying the aforementioned limitation to a non-resident simply because they file an IRPF return in their country of residence would undermine the purpose of the limit, as the operation of the analogous tax in the other country is unknown. In their opinion, this limit can only be applied to taxation in Spain on worldwide income and wealth; otherwise, equating income subject to taxation in the country of residence with worldwide income in Spain would lack consistency and would not serve the purpose of the rule.

For their part, the taxpayer maintains that the situations of taxpayers subject to real property tax and those subject to personal tax are comparable, differing only in their place of residence. In his opinion, the failure to apply the 60% limit to non-residents violates the principle of equality enshrined in Article 14 of the Spanish Constitution and the provisions of European Union law, as well as the principles of progressivity and non-confiscation enshrined in Article 31 of the Spanish Constitution. Regarding Spain's alleged ignorance of the Belgian tax analogous to Personal Income Tax (IRPF), the taxpayer refutes this argument, stating that it is untrue, since both countries share a legal environment with close similarities. He points out, in particular, that Spain and Belgium have had a Double Taxation Convention in place since 1995, which necessarily implies mutual knowledge of their tax systems. Furthermore, Article 23 of said Convention establishes methods for eliminating double taxation, and Article 24 prohibits discrimination.

1. SUBJECT MATTER AND GROUNDS FOR APPEAL
Both judgments seek to determine whether the element of habitual residence justifies the difference in treatment between residents and non-residents for the purposes of the Wealth Tax and the 60% limit provided for in Article 31.1 of the Wealth Tax Law.

The Balearic Islands Court of First Instance established in its legal reasoning that, to verify whether a measure respects the principle of equality before the law, it is necessary to specify that the situations to be compared are equal/comparable, that there is an objective and reasonable purpose that legitimizes the unequal treatment, and that the consequences leading to the disparity in treatment are reasonable, with proportionality between the means employed and the purpose pursued.
Therefore, as Article... Article 5 of the LIP (Law on the Protection of Personal Income) only distinguishes between the tax system based on habitual residence and the public sector, without including anything else. This leads to unreasonable and disproportionate treatment of non-residents compared to residents, since the latter can limit their total tax liability by up to 80%, while non-residents face no such limitation.

The State Attorney's position of differentiating between real and personal tax liability is a discriminatory measure that hinders the free movement of capital, as it only considers the place of residence, resulting in discrimination simply for residing in a country outside the EU.

2. REGULATORY FRAMEWORK
The applicable regulations focus on two provisions of the LIP: Article 5, which distinguishes between taxation based on personal tax liability (for residents) and taxation based on real tax liability (for non-residents); and Article 31.One, which establishes the so-called “60% limit”, according to which the combined Wealth Tax and Personal Income Tax quota cannot exceed 60% of the taxpayer's Personal Income Tax base.

3. APPLICABLE REGULATIONS
The applicable regulations focus on two provisions of the Wealth Tax Law (LIP): Article 5, which distinguishes between taxation based on personal obligation and taxation based on real obligation; and Article 31.1, which establishes the so-called "60% limit," according to which the combined Wealth Tax and Personal Income Tax (IRPF) liability cannot exceed 60% of the taxpayer's IRPF taxable income.

4. COURT'S RULING
The Third Chamber of the Supreme Court, in examining the appeal, begins by noting that the application of the 60% limit in Wealth Tax presupposes the existence of an IRPF liability. This leads the Supreme Court to consider whether this regulation entails discriminatory treatment of non-residents and, if so, whether it would be necessary to refer a preliminary question to the Court of Justice of the European Union (CJEU).

In its reasoning, the Supreme Court makes special reference to the CJEU Judgment of September 3, 2014 (European Commission v. Spain, C-127/12, EU:C:2014:2130). Although that decision concerned Inheritance and Gift Tax, in paragraphs 57 and 58 the CJEU declared that a difference in tax treatment based on residence may constitute a restriction on the free movement of capital. That CJEU judgment led to the amendment of the Inheritance Tax regulations by Law 26/2014 of November 27, which added a second additional provision to extend certain tax benefits previously reserved for residents to non-residents. The preamble to that legal reform emphasized the need to eliminate any form of discrimination based on residence.

The Supreme Court reiterates that, pursuant to Article 63.1 of the Treaty on the Functioning of the European Union, all restrictions on the movement of capital are prohibited, whether between EU Member States or between Member States and third countries. In this sense, a restriction is considered to be any measure that may discourage a non-resident from investing in a Member State, or a resident of a Member State from investing in other Member States.

In short, the key takeaway is that the case law of the Court of Justice of the European Union has consistently held that the fact that exercising the free movement of capital may be less attractive as a result of national tax legislation that treats domestic and cross-border situations differently is sufficient, in itself, to establish the existence of a restriction. In summary, the Supreme Court encapsulates the relevant EU doctrine in the following key points:

• Any restriction on the movement of capital between Member States (and also between Member States and third countries) is prohibited, in accordance with the TFEU.


• Restrictions that may discourage a non-resident from investing in a Member State, or a resident of that Member State from investing in other Member States, are prohibited.


• The free movement of capital is subject only to restrictive interpretations.


• Permitted differences in treatment must not constitute either a means of arbitrary discrimination or a disguised restriction. They are only admissible if they refer to situations that are not objectively comparable or, if they are otherwise justified by overriding reasons of public interest.


• To determine whether a cross-border situation and a domestic situation are comparable, one must consider the objective pursued by the disputed national legislation, as well as its object and content.


• The overriding reasons of public interest invoked as a possible justification for a restrictive measure must be adequate to ensure the achievement of the objective pursued and must not exceed what is necessary to achieve it.

Applying these principles to the specific case, the Supreme Court jointly analyzes Article 5 and Article 31.One of the Spanish Wealth Tax Law (LIP) in light of the case law of the Court of Justice of the European Union (CJEU). The Supreme Court emphasizes that the fact that national legislation treats taxpayers differently based on their residence, when they are in a comparable situation, is sufficient to constitute a restriction on the free movement of capital. Furthermore, it reiterates that the Wealth Tax is levied on the holding of assets and rights, so it is irrelevant whether the taxpayer is taxed under personal or real obligation: in both cases, the determining factor is the possession of that wealth, regardless of whether the taxpayer is resident in Spain or not. Consequently, it concludes that in the case under examination, the situations of a resident and a non-resident are objectively comparable. It should be added, moreover, that the non-resident already pays tax in Spain through the Non-Resident Income Tax on Spanish-source income and, in addition, pays a tax in their country of residence equivalent to Spanish Personal Income Tax (in Belgium, the so-called IPPTA). In light of the foregoing, the Supreme Court establishes that the disparity in treatment based solely on residency is unjustified, given that in both cases the tax is levied on the ownership of assets (whether on the entirety of the estate or on a portion thereof). The circumstance of being taxed under personal or real obligation is considered irrelevant, as it does not alter either the object or the essence of the tax, which remains the net worth of the individual.

In conclusion, the case under examination concerns a taxpayer who is a national of another EU Member State whose situation is objectively comparable to that of a taxpayer resident in Spain. The denial of the 60% limit in this case constitutes a restriction on the free movement of capital. Therefore, it is appropriate to recognize the right of non-residents to apply the limit established in Article 31.One of the Spanish Personal Income Tax Law (LIP), and the full tax liability for the corresponding tax year must be adjusted, with the taxpayer being reimbursed the amounts paid in excess, plus legally applicable interest.

5. CONCLUSION
In light of the foregoing, the Supreme Court concludes that the difference in treatment between resident and non-resident taxpayers for the purposes of applying the 60% limit of Article 31.1 of the Spanish Wealth Tax Law (LIP) lacks objective and reasonable justification. Taxpayers subject to real and personal tax obligations are in objectively comparable situations, since the Wealth Tax taxes the mere ownership of assets and rights, regardless of the taxpayer's tax residence. The automatic exclusion of non-residents therefore constitutes a restriction on the free movement of capital prohibited by Article 63 TFEU, without any overriding reasons of public interest that would justify an exception to this principle, nor is there adequate proportionality in the measure.

Consequently, non-residents must be granted the right to apply the limit of Article 31.1 of the LIP under the same conditions as residents, with the full tax liability for the corresponding tax year being adjusted and the amounts paid in excess being refunded, along with the legally applicable interest. This interpretation guarantees the tax's compliance with European Union law and with the constitutional principles of equality, progressivity and non-confiscation.