- On the 27thof January 2022 the Court of Justice of the EU rendered a very important ruling on the free movement of capital (Commission vs. Spain, case C-788/19). This ruling is the outcome of an infringement procedure brought by the Commission against Spain, because of the very heavy sanctions existing in Spanish tax legislation for taxpayers who failed to comply with the obligation to provide information concerning assets or rights held abroad (and also in case of partial or late compliance of that obligation). I am sure that this judgment will have important consequences and that it will raise many comments and analyses, particularly by tax law specialists. However, the aim of this post is much more modest, as I will limit my comments to the possible influence of this judgment on the penalties established by Spanish law for failure to declare virtual currencies held abroad, in the light of the provisions on the free movement of capital.
- Under Article 65.1.b) of the Treaty on the Functioning of the EU (hereafter TFEU), the obligation to declare information concerning assets, including those held abroad, would be an acceptable means of control. However, in its ruling the Court found that some aspects of the Spanish system of penalties in case of failure to comply with the obligation to declare bank accounts, immovable property and other assets held abroad were disproportionate. To sum up, the Court found that (par. 63 of the judgment):
“…
– by providing that the failure to comply with or the partial or late compliance with the obligation to provide information concerning assets and rights located abroad entails the taxation of undeclared income corresponding to the value of those assets as ‘unjustified capital gains’, with no possibility, in practice, of benefiting from limitation;
– by subjecting the failure to comply with or the partial or late compliance with the obligation to provide information concerning assets or rights located abroad to a proportional fine of 150% of the tax calculated on amounts corresponding to the value of those assets or those rights, which may be applied concurrently with flat-rate fines, and
– by subjecting the failure to comply with or the partial or late compliance with the obligation to provide information concerning assets or rights located abroad to flat-rate fines the amount of which is disproportionate to the penalties imposed in respect of similar infringements in a purely national context and the total amount of which is not capped,
the Kingdom of Spain has failed to fulfil its obligations under Article 63 TFEU and Article 40 of the EEA Agreement.”
- Certainly, the judgement of the Court of Luxembourg provides interesting insights into the principle of proportionality, in the context of the provisions on the free movement of capital, applied to administrative fines in the domain of tax obligations. However, I do not intend to explore them in detail. I will rather focus on the possible impact of this judgment on the obligation to inform tax authorities about virtual currencies held abroad. As for the fines in case of noncompliance, I will limit myself to analyse the flat-rate fine of EUR 5 000 for each data item or set of data relating to the same account or asset which should have been included in the declaration, or for each data or set of data which is incomplete, incorrect or false, with a minimum of EUR 10 000. Therefore, in this note I will not consider the other penalties envisaged in the CJEU ruling Commission vs. Spain.
The reason why this ruling may have an impact on holders of virtual currencies is that the Spanish legislator recently extended the obligation of informing on assets held abroad also to virtual currencies held abroad. The basic legal context is the following: in Commission vs. Spain the Court analysed Additional Provision (“Disposición adicional”) 18 of the Spanish General Law on Taxation (Law 58/2003, of 17 December, “Ley General Tributaria”, hereafter LGT), which was introduced in the text of the LGT by Law 7/2012, of 29 October. Its aim was to introduce a mandatory obligation of declaring different kinds of assets held abroad by persons subject to the different Spanish taxes. In its original version of 2012, Additional Provision 18 referred to traditional assets like, for instance, bank accounts, real estate, securities or share capital in any type of entity. In addition, it has to be taken into account that the exact conditions of application of Additional Provision 18 of the LGT depend on the regulations which develop it, which have established, for instance, that there will be no obligation to declare when the value of the assets is EUR 50 000 or less, and which have established a specific standard form -called “model 720”- for such a declaration (for a brief summary, see “Declarar bienes en el extranjero”, OCU Inversiones Inversiones, no. 97, January 2022, pages 18-19). However, as said before, quite recently this Additional Provision has been amended in order to extend the duty of declaration to virtual currencies held abroad (this was done via Article 13.26 of Law 11/2021, of 9 July, on the prevention of fiscal fraud).
Just the same as for other kind of assets, section 1 of Additional Provision 18 sets the declaration duty, and its section 2 the penalties in case of non-compliance of such obligation. As for the declaration duty, new letter d) of section 1 refers to the information to be provided, in the following terms:
“Información sobre las monedas virtuales situadas en el extranjero de las que se sea titular, o respecto de las cuales se tenga la condición de beneficiario o autorizado o de alguna otra forma se ostente poder de disposición, custodiadas por personas o entidades que proporcionan servicios para salvaguardar claves criptográficas privadas en nombre de terceros, para mantener, almacenar y transferir monedas virtuales.”
Translated into English, this provision would read: “Information about the virtual currencies located abroad of which the person concerned has the status of holder, beneficiary, authorized person or otherwise holds a right of disposal, guarded by persons or entities providing the service of safeguarding private cryptographic keys onbehalf of third parties, in order to hold, store and transfer virtual currencies.” (this is my own translation, withno legal value at all).
As for the penalties for non-compliance, they are envisaged in section 2, letter d), which indicates that failure to comply with the obligation to declare virtual currencies held abroad shall be liable to a flat-rate fine of EUR 5 000 for each data item or set of data relating to the same virtual currency which should have been included in the declaration, or for each data item or set of data which is incomplete, incorrect or false, the minimum fine being EUR 10 000. However, the fine is lowered in case the concerned person presents the declaration out of time, without prior request from the tax authorities. In such case, the fine is EUR 100 for each data item or set of data relating to each virtual currency, with a minimum fine of EUR 1 500. The same penalty applies when the declaration is submitted by means other than electronic, computer and telematic, where the use of such methods is mandatory. It is clear that these are the same penalties as those applied in case of failure to provide information on “traditional” assets held abroad, and which the CJEU declared contrary to the principle of proportionality in the context of the limits to the free movement of capital. As said before, the Court considered contrary to Article 63 TFEU flat-rate fines the amount of which was disproportionate to the penalties imposed in respect of similar infringements in a purely national context and the total amount of which was not capped, and which could be applied concurrently with a proportional fine of 150% of the tax calculated on amounts corresponding to the value of the non-declared assets, provided for by the first additional provision to Law 7/2012.
- Therefore, the key issue is if the doctrine established in Commission vs. Spain, concerning the disproportionate character of the flat-rate fines for non-declaration of traditional financial assets held abroad, could be also applicable to the same penalties, but this time applied in a situation where the taxpayer fails to inform of virtual currencies held abroad. In my view, this would be the case if this second situation could be considered as falling under any of the freedoms of the European internal market. Of course, there might be some discussion as which would be the relevant freedom in the different possible cases (for instance, free movement of capital or freedom of payments, or freedom to provide services by exchange agencies…). But, in general, and taking into account that Additional Provision 18.1.d) of the LGT refers to the mere holding of virtual currencies, it seems that the freedom mostly concerned would be the free movement of capital. But this entails a further question: can virtual currencies be considered “capital” in the sense of Article 63 of the Treaty? I think this question should be answered affirmatively. As it is well known, the main feature of capital operations is that their finality is investment or placement of funds (among many others, ruling Luisi and Carbone, of 31 January 1984, cases 286/82 and 26/83). As it has been rightly pointed out by L. Scarcella in the context of the specific case of Bitcoin(but I think that her reasoning may also apply to other virtual currencies) Bitcoinis not just a means of payment (when voluntarily accepted by the parties), but also, and even more, an investment, because experience shows that this cryptocurrency is not really used as a means of payment but rather as a store of value to be sold at a later stage (Taxing Cryptocurrencies. The VAT Treatment of Bitcoin as a Case-Study, page 5, summary of her doctoral dissertation, defended at the University of Graz on the 6th October 2020; accessed through the following link: http://www.eatlp.org/sites/default/files/taxThesisAwards/Scarcella_%20Dissertation%20Summary.pdf). Besides that, the “nomenclature” of capital operations included in annex I of Directive 88/361 is not an exhaustive list, but a merely indicative one or ad exemplum, as the CJEU has often reminded (for instance, among many others, the Persche ruling of 27 July 2009, case C-318/07, par. 24). In addition, the practice of the EU institutions so far would acknowledge the character of virtual currencies as financial instruments, for one purpose or another: for instance, Directive 2018/843, which modified the Directive on the prevention of money laundering, introducing some provisions for the control of virtual currencies, or the Commission’s proposal, of 24 September 2020, for a regulation on markets in crypto-assets (document COM/2020/593 final). Last but not least, the fact that virtual currencies are not legal tender does not affect the conclusion that they may be used as investment instruments (however, in this last regard, it ought to be mentioned that recently El Salvador became the first country in the world to recognize Bitcoin as legal tender; see the news on the “Bitcoin law” on the web page of the legislative assembly of that country: https://www.asamblea.gob.sv/index.php/node/11282).
- In conclusion, the ruling Commission vs. Spain of 27 January 2022 may have a considerable impact. In my view, it does not put in question, in view of existing EU law on the free movement of capital, the declaration obligations that Member States of the EU may impose on taxpayers or capital holders. This declaration obligations and procedures have been acknowledged as an appropriate means of control. What the judgment condemns is the specific regime of offences and penalties existing in Spanish law as far as information on assets abroad is concerned. Penalties can be imposed in case of non-compliance, but those penalties must conform to the principle of proportionality. In its judgment the Court sheds light on the criteria to evaluate such proportionality requirement in the field of tax sanctions.
The main purpose of this post has been to explain that, at least in the context of Spanish law, the doctrine established by the Court as to certain flat-rate fines per data item non-declared may also be applicable to investments in virtual currencies abroad, as a result of the TFEU provisions on the free movement of capital. When it adopted Law 11/2021, the Spanish legislator extended the existing regime of mandatory declaration of assets (capital) held abroad to virtual currencies. In doing so, it acknowledged that virtual currencies are also investment instruments. If this is the case, there is little doubt that they may be concerned by the provisions of the Treaty on the free movement of capital. In my view, the consequence would be that the obligation to declare virtual currencies held abroad, recently put in place by the Spanish legislator, is perfectly compatible with EU law. By contrast, the fine established in Additional Provision 18.2.d) of the LGT should be considered contrary to EU law. Consequently, until the Spanish legislator does not review it and amend it in consequence, it will not be possible to apply it to holders of virtual currency abroad which fail to present the declaration.
Dr. Miguel Gardeñes Santiago