updated 2:11 PM CET, Oct 31, 2023

BREAKING: European Court of Justice rules against Spain's 'FBAR'...

European Court of Justice, Luxembourg European Court of Justice, Luxembourg

...citing disproportionate penalties, pan-EU capital movement infringement 

Europe's top court has ruled against Spain's Modelo 720 "foreign asset law", declaring that its disproportionate penalties and potentially restrictive effects on the free movement of capital and payments across EU borders were violations of European regulations. 

The ruling, which had been widely expected, is final, sources in Spain said.

In a decision released last Thursday, the European Court of Justice (ECJ) in Luxembourg agreed with an earlier European Commission finding, which took the view that the "Form 720" penalties for failing to properly disclose foreign assets were "excessive, and could stymie the right of EU citizens to move assets freely across borders," according to a summary posted on the CourthouseNews.com website and coverage by other English-language media.

Spanish officials responded by saying that the Modelo 720 regulations would be modified in line with the ECJ's findings, while stressing that they remain in force. 

According to Spanish media, Spain introduced Modelo 720 into law in 2012, just two years after President Obama signed the Foreign Account Tax Compliance Act, which also seeks to monitor taxpapers assets held outside of the country.

(Among the key differences between the two laws is the fact that the U.S. taxes on the basis of citizenship, meaning that Americans who live outside of the U.S. are subject to FATCA, whereas Spaniards who are tax resident outside of Spain are not bound by Modelo 720.)

Also unlike FATCA, Modelo 720 compliance isn't the responsibility of banks and financial institutions outside of Spain that have American clients, but must be handled by the taxpayer in question, which makes it more like the U.S. asset reporting law known as Foreign Bank Account Reports (FBARs).

FBARs technically date back to the 1970s, but the U.S. began ramping up enforcement of them over the last two decades, and especially since around 2009 and 2010, in response to growing tax evasion concerns in Washington that also were behind FATCA. And like Spain's Modelo 720, the FBAR regulations provide for notoriously draconian penalties, as the AXFNJ and other media have been reporting for years.

Estimates as to the number of Americans currently living in Spain vary widely, but a recent posting on the Lisbdnet.com blog, which cited data from Spain's Instituto Nacional de Estadística, put it at around 40,712.

Americans among those caught in Modelo 720 net

Modelo 720 may have been aimed at Spanish citizens living in Spain, but Americans who live there are also covered by it, and as a result, some have been known to fall foul of it, according to a wealth manager who specializes in looking after U.S. expats. 

"I don't think it (Modelo 720) will completely disappear, because it provides useful information to the Spanish government," this wealth manager, who is based in the U.S. but whose clients include Americans living in Spain, and who requested anonymity, added.

"However, they have until March 31st to amend it."

He went on to note that some Americans who were either had complied with the regulations or who did so improperly had been hit with Modelo 720 penalties that, in many cases, exceeded the value of the assets reported; some were, he said, as much as 150% of the value of the assets in question. 

The scale of the penalties that have been assessed is, in fact, why Spanish officials are considering the possibility of giving refunds to some of those whose Modelo 720 penalties might, especially in the wake of last week's ECJ ruling, be deemed to have been excessive.

Amnesty period, then the penalties began...

According to the CourthouseNews.com article, Modelo 720 – like many other tax evasion-prevention laws that were being introduced elsewhere in the world around 2012 – came into force alongside an amnesty period, during which Spanish residents could declare their overseas holdings without having to worry about being penalized.

After that period ended, as noted above, the penalties came as a huge surprise to many who were caught out by the new law. 

The CourthouseNews.com article referred to a specific case (which other other news reports on Thursday's ruling also cited), concerning a taxi driver who had worked in Switzerland for most of his life, but had retired to Granada, where he had been fined €442,000 ($US495,000) for belatedly submitting documentation on his €340,000 (US$380,000) in retirement savings. 

"Madrid argued that severe penalties were needed to prevent tax fraud," the CourthouseNews.com article continued.

"[But] the court was unswayed." 

As a result of these penalties, "following several high-profile cases of retirees who were fined hundreds of thousands of euros for improperly filling out forms, Brussels stepped in," the article went on.

"The [European Commission] – the EU's executive branch – first brought infringement proceedings against Spain in 2015. 

"It eventually referred the case to the Court of Justice after talks with Spain to change the law failed."

As for how Modelo 720 could suppress the free movement of capital across EU borders, the ECJ noted that it tended to treat assets held abroad by Spanish citizens as "unjustified capital gains," and at that point, saw them as justifiably taxable income.

"That oligation is likely to dissuade, prevent or limit the possibilities for residents of that Member State [Spain] to invest in another Members State," the court said, according to TheOlivePress.es.

What Modelo 720 requires of taxpayers

Under Modelo 720 – which, experts stress, remains in force for now, pending promised modifications – residents of Spain with €50,000 (US$56,330) or more in overseas assets are obliged to make an annual declaration of this fact, via a Form 720. 

(This compares with the U.S. FBAR filing minimum of a total of US$10,000 or more in all of an American's non-U.S. financial accounts, even if just for one day. As FBAR critics often point out, that minimum hasn't changed since FBARs were introduced by the Bank Secrecy Act of 1970, even though, if had it been adjusted for inflation, it would now be closer to US$65,400.)

At present around 60,000 Spanish taxpayers are filing the Modelo 720 reports each year, several media reports noted. 

Where the Modelo 720 reporting requirement could prove to be particularly helpful to Spain, some observers point out, would be in flagging up Spanish taxpayers' holdings in the U.S., since the U.S. is one of the few major countries not signed up to the Organisation for Economic Cooperation & Development's Common Reporting Standard, which is an automatic information reporting regime currently used by more than 100 countries.

Critics of the U.S.'s failure to join the CRS claim that this has helped to make the U.S. one of the world's top tax havens.

To view the ECJ court documents, which are in Spanish, click here.

Last October, Bright!Tax, the globally-focused U.S. expat tax firm, published a round-up of what U.S. expats living in Spain need to know about taxes  –  both in the U.S. and in Spain. To view this round-up on the Bright!Tax website, click here.