Introduction: When Two Legal Worlds Collide
For decades, the trust has been the Swiss Army knife of Anglo-Saxon wealth and estate planning. Ubiquitous in the United States and United Kingdom, it is the cornerstone of family office structuring, private client advice, and asset protection. Yet, for individuals or families with links to Spain—whether as residents, investors, or beneficiaries—the Spanish tax system presents a legal conundrum that demands rigorous analysis and careful structuring.
Despite the internationalisation of capital, the trust remains a legal alien in the Spanish civil law tradition. The lack of direct equivalence leads to significant challenges when reconciling common law concepts with the tax, legal and reporting regimes of Spain. This article examines the current Spanish approach to trusts, highlights the pitfalls and, above all, offers strategic recommendations for international clients.
I. The Conceptual Dissonance: Trusts vs. Civil Law
The trust is a creature of common law, rooted in equity and fundamentally alien to the civil law tradition. Whereas Anglo-Saxon jurisdictions embrace the split between legal and equitable title, Spanish law recognises only unitary ownership (dominio). There is no domestic trust as such in Spain; nor does the Spanish Civil Code offer an analogous structure. Instead, closest comparators—such as fideicomisos or patrimonios protegidos—fall short of replicating the legal complexity and flexibility of the Anglo-American trust.
Spanish courts and the tax authorities have, over the years, struggled to define the trust for domestic purposes. A key reference is the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition, ratified by the UK but not by Spain, which further accentuates the legal disconnect.
II. Spanish Tax Approach to Trusts: The Triangular Analysis
In the absence of a positive legal framework, Spain has developed a doctrinal and administrative approach based on the “look-through” principle—examining, case by case, the roles of settlor, trustee, and beneficiary. The treatment pivots on three axes: Income Tax, Wealth Tax, and Inheritance and Gift Tax.
1. Income Tax (IRPF)
The Spanish tax authorities consistently disregard the trust as a taxpayer. Instead, taxation is attributed either to the settlor, the beneficiaries, or—exceptionally—the trustee, depending on who holds effective control and the nature of rights conferred. The principal criterion is the concept of transparency fiscal, under which the legal form of the trust is ignored in favour of the economic reality.
- Grantor Trusts / Revocable Trusts: If the settlor retains control or powers of revocation, income and gains are attributed to the settlor, irrespective of whether he/she is a formal beneficiary.
- Irrevocable Non-Discretionary Trusts: If the trust is genuinely irrevocable, with fixed interests, taxation falls upon the beneficiaries in proportion to their entitlements.
- Discretionary Trusts: For “fully discretionary” structures, there is a trend to attribute income on a look-through basis only upon distribution, which may be classified as capital gains, investment income, or—on occasions—gratuitous transfers, depending on the facts.
Spanish tax rulings (e.g. V3316/20, V1495/16, V0989/14, V1003/14, V1226/14) confirm this look-through approach, systematically seeking to pierce any formality and tax the substance.
2. Wealth Tax (Impuesto sobre el Patrimonio)
Spain applies wealth tax on worldwide assets for residents and on Spanish assets for non-residents. Again, the trust is ignored as an entity: the key question is who, in substance, “owns” the assets for Spanish purposes.
If the settlor retains powers of disposal or revocation, assets are attributed to the settlor. If the beneficiaries have fixed, vested rights, assets are allocated pro rata to their interest. The trustee is never considered the taxpayer.
3. Inheritance and Gift Tax (ISD)
Perhaps the greatest complexity arises in succession and gift scenarios. Transfers to, or from, a trust may be treated as inter vivos gifts or as acquisitions mortis causa, depending on the timing and structure. Spain does not recognise the trust as a shield against gift or inheritance tax—distributions from the trust to Spanish-resident beneficiaries are taxable, and the applicable rates are notoriously high and progressive.
III. Tax Risks: Control, Transparency, and Anti-Avoidance
Recent Spanish practice has been to apply a particularly aggressive anti-avoidance doctrine to trusts, especially when family or closely held business structures are involved. The risk of “effective control” is central, as Spanish law (notably Article 305 LGSS) presumes control where shares or interests are held directly or indirectly by the individual and close relatives—including through trusts. This can have severe consequences, not only for tax but also for the eligibility for special expatriate regimes such as the “Ley Beckham”.
Where the trust structure is viewed as a vehicle to circumvent Spanish tax, authorities will likely apply a “substance over form” doctrine and disregard the structure entirely.
IV. Reporting Obligations: Modelo 720 and Beyond
Spanish residents are required to disclose foreign assets—including assets held in trust—via the notorious Modelo 720. The penalties for non-compliance are draconian. While the exact reporting depends on the nature of the interest in the trust, the prudent view is to report whenever a Spanish resident is a settlor, trustee, or beneficiary, or can be deemed to have any kind of beneficial interest.
V. Strategic Recommendations for International Clients
1. Meticulous structuring is essential. Where possible, ensure the settlor relinquishes all control and powers, with independent trustees and clear separation between personal assets and trust assets.
2. Document, document, document. Prepare robust evidence—minutes, trust deeds, independent trustee records—that prove the lack of control and effective independence of the trust.
3. Seek advance tax rulings. In complex or high-value scenarios, a binding ruling (consulta vinculante) from the Spanish Directorate-General of Taxes (DGT) can provide a degree of legal certainty, though not always clarity.
4. Avoid “sham” structures. Spanish authorities are particularly sensitive to trusts that lack commercial or family substance, or where the settlor continues to act as de facto owner.
Conclusion: Caution and Foresight
Spain’s approach to trusts remains essentially pragmatic and defensive. For American and British families, what may seem like routine structuring at home can trigger significant, even existential, tax and reporting consequences when Spanish residency or investments are contemplated. The best protection lies in rigorous advance planning, unambiguous documentation, and a willingness to adopt a conservative approach in line with the prevailing doctrine of “substance over form”.
