B Law & Tax
01 June 2023

Tax advisor: Galicia’s appeal against lifetime inheritance dismissed

The Constitutional Court has ruled that ‘lifetime inheritances’ must be taxed in the Personal Income Tax (IRPF). This is the conclusion reached by the court in rejecting the appeal filed by the Xunta de Galicia against the modifications approved in 2021 to combat tax fraud, which focused on this type of donations. The Plenary considers that this regime does not constitute double taxation nor does it infringe the Constitution by being applied retroactively. These were two of the main arguments presented by the Xunta in its appeal against the tax reform included in Law 11/2021, of July 9.

This measure is justified by arguing that, otherwise, these agreements could be used to avoid the tax on capital gains generated when an asset is transferred during life. The Xunta de Galicia, whose legal system regulates this type of ‘inheritance’ through the figure of ‘apartación’, filed an appeal claiming that the new rule generated double taxation and forced the beneficiary to pay taxes on a capital gain that does not belong to him, but belongs to the person who had left him that property.

The Constitutional Court rejects these considerations. Firstly, it points out that there is no double taxation, since the economic capacity subject to personal income tax (IRPF) is different from that taxed under inheritance and gift tax. As to whether the heir is taxing his own or another’s gain, it is emphasized that the Law applies a similar rule to other gratuitous transfers, and that the legislator has broad freedom to define the principle of economic capacity, being able to adjust it for reasons of taxation technique. In relation to whether this creates differences with traditional inheritances, the Plenary indicates that inheritance agreements or contracts have effects in the present, and the legislator can legitimately take this circumstance into account by not applying the same tax treatment to them as to transfers by death. Finally, as regards retroactivity, the objection raised by Galicia is dismissed, since the income derived from the transfer of the assets received in this inheritance is generated “at the time of disposal” and must be taxed according to the regulations currently in force, not the one existing at the time of acquisition.

B Law & Tax International Tax & Legal Advisors.


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