On the one hand, civil law countries usually follow the direct accrual of the estate system whereby legal successors acquire the estate directly from the decedent either immediately upon death or upon their acceptance. On the other hand, common law countries generally follow the indirect devolution of the inheritance through an intermediary system whereby the estate is transferred to the personal representative, executor or administrator whose duty is to ascertain the estate, pay the deceased's debts, administer the estate and then distribute the surplus among the persons entitled to the estate by will or the rules of intestate succession.
This difference between private law systems explains why in some countries, generally civil law countries, the taxpayer under an inheritance is the heir whereas in other countries, normally common law countries, the taxpayer is not the heir but the intermediary, who pays taxes before passing on the estate. Spain, as a civil law country, follows the direct accrual upon acceptance system and therefore the heir is liable to tax under inheritance tax rules.
In general terms, a non-tax resident is only liable to inheritance tax in Spain in so far as he/she receives Spanish-sourced assets, regardless of the tax residency of the deceased. Further complexity in Spain derives from the fact that each of the 17 regions has powers to enact its own inheritance tax laws. For this purpose, the Spanish legislator has established complicated connecting factor rules for the purpose of determining the regional applicable law both for purely domestic and cross-border inheritances.
In past years, there has been competition among Spanish regions, which has resulted in a race to the bottom. More than half of the regions in Spain (Madrid, Catalonia, Balearic Islands, Canary Islands, Valencia, Murcia, Cantabria, Castilla-La Mancha, Extremadura, Galicia, la Rioja, Ceuta and Melilla) have introduced tax breaks for inheritance and gift tax, some of them even up to 99.9%.
Although the European Court of Justice has decided against the discrimination between non-tax residents and tax residents under inheritance and gift tax in Spain, the prevailing situation still discriminates among tax residents depending on the above-mentioned connecting factors and regional tax laws. In the existing political environment, there is a possibility that a minimum effective taxation could be imposed in all regions.
Foreign holders of Spanish-based assets could cautiously think about transferring their assets in order to enjoy the existing rules. However, in most regions, tax breaks are only available for inheritances and not for gifts, which may imply considerable taxation for the donee. Furthermore, the donor may also be liable to tax on the capital gain accrued under personal income tax. Such capital gain would not be taxable if the transfer was characterised as mortis causa.
There is however another way. Under Spanish private law some regions have their own succession laws, whose origins are older than the era of codification, and which allow inheritance agreements. Under these contracts, it is possible to transfer a part of the estate during the life of the testator, and such transfer according to the Spanish tax administration would qualify as a mortis causa transfer.
According to EU Regulation 650/2012, a foreigner habitually resident in Spain may enter into an inheritance contract either when he/she is habitually resident in a Spanish region which foresees these contracts (e.g. Catalonia, Balearic islands, Aragon, Galicia, and so on) or, regardless of his/her region of residence, because the relevant national law does (possibly Erbverzichtsvertrag under German and Swiss law). The same would of course apply in relation to Spanish assets if he/she were not resident in Spain and his/her country of residence allowed inheritance agreements. In the field of succession tax, substantive law is still king, and the way individuals have chosen to transfer their assets under private law will determine the taxable event and will thus be respected by the tax authorities.
