Once again Spain finds itself in the spotlight of the EU Commission for not grating equal treatment on the sale of shares of Spanish entities by residents of the European Economic Area

On 7 March 2019, the European Commission (“Commission”) published its infringement package indicating those Member States that are not complying with European Union (EU) law and setting out their situation. In this communication, the Commission expressed its disagreement regarding the treatment of capital gains realized upon the transfer of shares in Spanish entities by taxpayers resident in Norway, Island and Liechtenstein.

Spain grants, under certain terms and conditions, an exemption regarding the transfer of shares by EU residents. However, residents of the European Economic Area (EEA) cannot benefit from this exemption on the basis that they are not EU residents. To this end, the Commission considers that the fact of treating EU residents differently to EEA residents in this regard constitutes a restriction on the freedom of establishment and the free movement of capital enshrined in Article 63 TFEU and Article 70 of the EEA Agreement.

Spain is now required to take steps to modify its non-resident legislation and allow residents of EEA countries to also benefit from the exemption. If Spain does not take such steps, the Commission will seek to bring Spain before the Court of Justice of the European Union with a view to obtaining a decision requiring Spain to undertake the necessary legislative modifications

Nevertheless, the crucial point on this issue will be if after the modification of the Spanish law, EEA residents that could not apply the exemption will be able to request the application of this exemption with retroactive effect and to what extent.

It is clear that the debate between Spain and the EU in direct tax matters is once again open and it will be necessary to closely follow how it progresses before taking any action.