Prescription of unjustified capital gains in Spain
The unjustified capital gains are those that the taxpayer cannot prove legally and transparently in his Personal Income Tax (IRPF) return.
In Spain, these gains are usually investigated by the Tax Agency, and if they cannot be justified, they may involve considerable tax sanctions.
What are unjustified capital gains?
Unjustified capital gains refer to those increases in the assets of a taxpayer that cannot be explained through declared income or any other legal source of income. These gains may arise, for example, from unreported transactions, unjustified cash income or acquisition of goods without record of the financial resources used for the purchase.
Within the framework of the Personal Income Tax Law, specifically in article 39 of Law 35/2006 on Personal Income Tax, it is established that the taxpayer must declare all his income and capital gains. If differences are detected between the taxpayer’s assets and what is declared, it can be considered that there has been an unjustified capital increase.
Limitation period in the tax field
The general limitation period in tax matters is regulated in the General Tax Law (LGT), in its article 66. The period is four years, counted from the day following the day on which the deadline for submitting the corresponding tax return ends. This period is applicable both for the review of tax returns and for the requirement of additional settlements and sanctions.
In the case of unjustified capital gains, the Tax Agency has a period of four years to investigate and, where appropriate, demand payment of the amounts owed. This includes both the regularisation of personal income tax and any additional sanction that may be imposed.
The deadline begins from the day following the end of the voluntary period of submission of the declaration, which is usually June 30 of each year. However, there are situations that may interrupt or suspend this period, such as the filing of appeals or the initiation of a tax inspection procedure.
Unjustified capital gains and "long prescription loss"
In cases where unjustified capital gains come from property or rights not declared at the time, the limitation period may be extended. This happens in cases in which the origin of the capital increase goes back more than four years and the taxpayer has not declared it correctly.
Article 39.2 of the Personal Income Tax Law establishes that unjustified increases can be charged in the tax period in which they are discovered, regardless of when they have occurred. This provision allows the Tax Agency to claim unjustified capital gains, even when they originated more than four years ago, what is colloquially known as the “loss of long prescription.”
This case is particularly relevant when the Tax Agency discovers assets or rights abroad that were not duly declared through form 720. According to Law 7/2012, those who do not properly declare the assets located abroad can face sanctions and be taxed for the corresponding capital gains without time limitation, that is, without the prescription operating.
Interruption of the limitation period
The General Tax Law provides for certain causes that may interrupt the limitation period. Once interrupted, the term starts again from scratch. Among the most common causes of interruption are:
The initiation of a tax inspection procedure. In this case, the Tax Agency may interrupt the limitation period when it formally initiates an inspection or verification of the taxpayer.
The presentation of appeals or claims by the taxpayer. If the taxpayer challenges a settlement or sanction imposed by the Tax Agency, the limitation period is suspended until the appeal is resolved.
The recognition of the debt by the taxpayer. If the taxpayer acknowledges that there is an unsatisfied tax debt, the limitation period is interrupted.
Effects of prescription on unjustified capital gains
When the prescription has been met, the Tax Agency loses the legal capacity to demand the payment of the amounts owed for unjustified capital gains. However, if the limitation period has not occurred or has been interrupted, the Agency may require the regularisation of the undeclared amounts, imposing surcharges and interest on arrears.
It is important to keep in mind that, in the event that unjustified capital gains are discovered through administrative procedures such as tax inspection, the burden of proof falls on the taxpayer. If it cannot prove the legal origin of the capital increases, the Tax Agency may proceed with the regularisation and sanction.
Tax consequences and sanctions
The consequences of not justifying an increase in assets can be severe. Regularising the debt will entail paying the IRPF corresponding to the unjustified gains, plus late payment interest and possible surcharges. In addition, the Tax Agency can impose economic sanctions, which can range from 50% to 150% of the undeclared amount, depending on the severity of the infringement.
If the undeclared assets or rights are located abroad and the obligation to submit Form 720 was not fulfilled, the sanctions can be much higher, reaching 5,000 euros for each undeclared or incorrectly declared item, with a minimum of 10,000 euros.
The statute of limitations for unjustified capital gains is a fundamental issue in the Spanish tax field. Although the general statute of limitations is four years, there are exceptions that can extend this period, especially when it comes to assets not declared abroad. It is vital to have specialized advisors who can offer you an appropriate response for this type of case.
