Inheritance Tax on the Balearic Islands

Is Spanish or Balearic Inheritance Tax Law Applicable?

In Spain, such autonomous regions as the Balearic Islands have a certain degree of legislative autonomy regarding inheritance and gift tax. This means that they are entitled to enact their own regulations, for instance, with regard to tax exemptions. However, if no specific regulations of the Balearic Islands apply, the general Spanish inheritance and gift tax laws must be observed.

Is There a Free Choice of Applicable Law?

Until 2015, the autonomous law of the Balearic Islands only applied if there was a direct connection to the region, which was not the case for many Germans. However, for inheritance cases as of 1 January 2015, heirs can choose to apply Balearic law if one of the following conditions is met:

• Tax residence of the deceased: If the deceased was tax resident of the Balearic Islands, their heirs, even those residing in Germany, can choose Balearic law.
• Majority of assets in Spain: If the deceased was a German resident, it is possible to choose the law of the region where the majority of their assets are located.
• Residence of the heir: If the deceased had neither residence nor assets in Spain, the law of the region where the heir was resident at the time of acquisition will apply.

How are Tax Allowances Determined?

On the Balearic Islands inheritance tax rules stipulate a range of tax allowances, which vary depending on the heir’s degree of kinship in relation to the deceased:

• children under 21 years of age: up to €50,000.
• children over 21 years of age, spouses, and parents: up to €25,000.
• more distant relatives and in-laws: up to €8,000.
• all other persons: up to €1,000.

Is There a Tax Exemption for Family Homes?

A particularly generous tax exemption is granted for principal residences on the Balearic Islands. The maximum amount of this exemption has been increased to €180,000 per beneficiary and, contrary to the provisions of the general Spanish law, this exemption amounts to 100% instead of 95%. In addition, the minimum holding period for the principal residence has been reduced to five years.

Is There a Tax Exemption for a Family Business?

If either a descendant of the deceased or their surviving spouse inherit a sole proprietorship or a share in a business on the Balearic Islands, this acquisition is 95% tax-exempt. This regulation also applies to gifts and is tied to a holding period of only five years, which is very advantageous compared to what is granted in other regions.

How High are Tax Deductions?

• Tax Category I and II: children, spouses, grandparents, and grandchildren are entitled to a 100% deduction on the tax liability.
• Tax Category III: siblings as well as nieces, nephews, uncles, and aunts are entitled to a 50% deduction if the deceased had no descendants or if they were disinherited.
• All other persons in this tax category are entitled to a 25% deduction.

Does Double Taxation Apply?

If either the testator or the heir are German tax residents, in addition to the Balearic inheritance tax, German inheritance tax may also be incurred. For double taxation to be avoided, as a rule, the paid tax can be offset. However, tax credit in Germany is only granted in the case of the unlimited gift tax liability according to German law.

Is it Necessary to Submit a German Tax Declaration?

If there are links to Germany, German gift tax may also be incurred. According to Section 30 of the Inheritance Tax and Gift Tax Act, the donee must report any gift to the tax office responsible for administering the inheritance tax within three months of becoming aware of the acquisition. The tax office may demand that each party involved in the gift-giving transaction file a tax return within a specified period. This period may be extended upon request.

When is Gift Tax Due in Germany?

Gift tax in Germany is due within one month after the tax assessment notice has been issued.

When is Spanish Inheritance Tax Due?

In Spain, inheritance tax must be paid no later than six months after the death of the testator.

CPA Nyikolaj Szmolenkov M.A.