Inheritance and Gift Tax Reform (2024)

What were the origins of the case?

The case began when the State Tax Administration Agency (AEAT) inspected an IRPF taxpayer who, along with their spouse, had donated eight properties to their children. The taxpayer declared capital losses for four of these properties in their 2013 IRPF return, as their value at donation was lower than the acquisition value. 

The AEAT issues a provisional assessment, stating that such losses couldn`t be recorded in the IRPFD, in line with Article 33.5.c) of Law 35/2006. This article excludes capital losses from the lucrative transfers inter vivos or gifts from being computed for IRPF purposes. 

How did the TSjCV initially rule? 

On September 28, 2022, the TSJCV sided with the taxpayer; interpreting Article 33.5.c) to mean that any change in asset value, whether a gain or loss, should be reflected in the IRPF. Consequently, the TSJCV nullifies the AEAT`s provisional assessment. 

What prompted the Supreme Court Appeal? 

Disagreeing with the TSJCV`s interpretation, the State Attorney filed an appeal. The Supreme Court admitted the appeal and focused on whether the capital losses from lucrative inter vivos transfers should be recognized when gains from the same transfers also declared. 

What was the Supreme Court`s decision? 

The Supreme Court overturned the TSJCV`s decision. It concluded that article 33.5.c) of the IRPF Law clearly prohibits the consideration of capital losses from lucrative inter vivos transfers for IRPF purposes. The court rejected the distinction between "economic loss" and "fiscal loss". Essentially, since the 1991 Law, references recording decreases in value from such transfers have been removed, which supports this interpretation. The court also emphasized that the legislative intent was aiming to prevent tax avoidance by excluding losses from voluntary actions, and that this provision does not, in any way, violate the constitutional principle of economic capacity, as allowing such deductions would undermine tax injustice. 

What jurisprudential standard was established? 

The Supreme Court set the following standard: 

"In interpreting Article 33.5.c) of Law 35/2006, it is not appropriate to recognize, for tax purposes, declared capital losses from lucrative inter vivos transfers or gifts, even if gains from the same transfers are also declared."

What are the implications for Administrative Practice? 

This ruling aligns with current administrative practices, as its reasoning mirrors that of the Central Economic-Administrative Tribunal (TEAC) in its 2021 resolution and various resolutions by the General Directorate of Taxes. It confirms that IRPF taxpayers cannot deduct capital losses from lucrative transfers. 

What are the broader implications for taxpayers? 

The Supreme Court`s decision creates an asymmetric tax treatment of donations compared to onerous transfers. While capital gains from donations must be recorded, capital losses cannot be deducted. This may lead taxpayers to seek alternatives to in-kind donations. 

The Tax Administration can employ mechanisms such as conflicts in tax law application or simulation to address actions deemed contrary to current law. This ruling is expected to be reiterated in pending classification appeals, ensuring consistency and predictability in the tax system.

What were the lasting effects of the Supreme Court`s ruling? 

In summary, the Supreme Court`s ruling on capital losses from lucrative transfers sets a clear precedent that aligns with existing administrative practice. It upholds the principle of tax justice by preventing deductions of losses from voluntary actions, ensuring a consistent application of the IRPF law, and maintaining the integrity of the tax system.