The Court of Justice of the European Union handed down a ruling on September 3, 2014 (C-127/12, Commission/Spain), in which Spanish law on inheritance and gift tax (Impuesto sobre Sucesiones y Donaciones) is considered to restrict the free movement of capital since it involves differences in tax treatment between tax residents in Spain and nonresidents.

The controversy giving rise to the ruling of the court derives from the fact that regional/state law applies only in connection with the territory of a state. Thus, when an heir, donee, or legatee nonresident in Spain is involved, or in the event of an inheritance or donation of a real estate asset located outside the Spanish territory, given the lack of a state connection, the inheritance or donation will be subject to national law, with the tax cost thereof. However, in the event of inheritances or donations made between Spanish tax residents (that is, with a regional/state connection), the reductions envisaged by the various states are applicable, and the tax burden for a comparable situation is generally lower. We have, therefore, a situation in which nonresidents are normally subject to a higher taxation by the mere fact of being nonresidents and cannot benefit from the regional/state tax benefits that otherwise apply to residents in Spain.