Please see below the latest financial update from Blevins Franks. Please do not hesitate to contact Paul should you have any questions related to this or other financial matters.
The new, improved, Modelo 720 penalty regime
By Paul Montague, Partner, Blevins Franks
Spanish residents are obliged to declare their offshore assets on Modelo 720 each year. The penalties have been controversially punitive, but now, following a European Court of Justice ruling, Spain has amended this penalty regime to much more acceptable levels.
10 years ago, the Spanish government announced a new requirement for every resident of Spain to report the assets they own outside the country. The annual Modelo 720 remains firmly in place today, and is in addition to submitting income and wealth tax returns.
Why was Modelo 720 introduced?
Introduced in the aftermath of the financial crisis, Modelo 720 was a key element in the tax authority’s efforts to prevent and uncover tax fraud. It was a game changer in terms of the information it collects and uses to monitor taxpayers’ overseas assets.
To encourage everyone to meet this obligation, the fines and penalties imposed for failing to submit this form or under-declaring assets were extremely harsh.
In many cases, the penalties and fixed fines amounted to more than 100% of the value of the assets in question. On top of this, there was no limit as to how many years the tax authority could investigate and impose penalties for.
European Court of Justice ruling
After receiving several complaints, the European Commission reviewed the legality of the Modelo 720 regime and in 2015 opened an infringement procedure against Spain.
In January 2022 the European Court of Justice issued its ruling. After an in-depth analysis of the tax obligation and its penalty regime, the Court ruled:
- The penalty regime established for Modelo 720 is disproportionate and infringes the EU principle of free movement of capital.
- The non-application of the statute of limitation to the tax obligations derived from Modelo 720 also infringes the principle of free movement of capital and the principle of legal certainty.
As a result, Spain has now amended this penalty regime, making it much more proportionate and limited to four years.
Note, however, that only the penalty regime has changed. As a resident of Spain, you remain obliged to complete and submit Modelo 720 each year (if you meet the criteria outlined below). There is no indication this will change in future.
Modelo 720 new penalty regime
Modelo 720 is now subject to the general penalty regime established in the Spanish General Tax Law. The fines and penalties for failure to file Modelo 720, or filing it incompletely or inaccurately, are therefore substantially reduced as follows:
- The fixed pecuniary fine is now €20 (previously €5,000) for each piece/set of information that should have been included in the individual’s declaration.
- The minimum penalty is €300 (previously €10,000) and there is now a maximum of €20,000 (previously there was no maximum).
- These penalties and the minimum and maximum limits will be reduced to 50% if the Modelo 720 is filed after the deadline, but before receipt of notification of non-compliance by the Spanish tax authorities.
- Note however that the penalties will be doubled if the undeclared assets or rights are located outside the European Union.
To give an example of how much lower the new penalties are, if a resident failed to declare a foreign bank account, under the old regime the penalty was €25,000. Going forward the penalty is just €300 (or €600 if outside the EU).
Also – and importantly – the four-year statute of limitations now also applies to Modelo 720. This means that the tax authorities cannot fine you for more than the last four tax years.
A reminder of the Modelo 720 rules – who needs to submit a form and when
Modelo 720 is compulsory for those who meet the criteria to be resident in Spain for tax purposes.
You have to report all assets in a particular category if the value of your total assets in that category amounts to over €50,000:
- Accounts held with financial institutions (banks)
- Immovable property
If your assets in each of the three categories amount to less than €50,000, you do not need to submit a report. You also don’t need to submit a report if you have previously submitted Modelo 720 and none of your assets have grown by €20,000 or more, and you have not sold an asset or closed an account, and you have not obtained any new assets.
For Modelo 720 purposes you only need to declare assets located outside Spain. The deadline is 31st March each year, covering the assets you owned at the end of the previous year.
Tax and Modelo 720 planning
How you hold your assets makes a difference to how much tax you pay in Spain, so with professional advice you may be able to use compliant arrangements to lower your tax liabilities on your capital investments.
You will still need to submit Modelo 720, but consolidating your investments would make the process easier. If you hold many different investments and offshore assets, completing your online declaration will be particularly time consuming and arduous. If instead you restructure many investments into one arrangement, Modelo 720 will be much more straightforward.
It’s fair to say that many Blevins Franks clients who have restructured their assets to improve their position from a Spanish tax point of view, invariably end up with much simpler affairs, so completing Modelo 720 normally becomes a much simpler process for them.
Blevins Franks Wealth Management Limited (BFWML) is authorised and regulated by the Malta Financial Services Authority, registered number C 92917. Authorised to conduct investment services under the Investment Services Act and authorised to carry out insurance intermediary activities under the Insurance Distribution Act. Where advice is provided outside of Malta via the Insurance Distribution Directive or the Markets in Financial Instruments Directive II, the applicable regulatory system differs in some respects from that of Malta. BFWML also provides taxation advice; its tax advisers are fully qualified tax specialists. Blevins Franks Trustees Limited is authorised and regulated by the Malta Financial Services Authority for the administration of trusts, retirement schemes and companies. This promotion has been approved and issued by BFWML.