TRUSTS and its general tax treatment in Spain

The “trusts” and its tax treatment are a recurring topic in the tax consultations of the Spanish tax administration. To understand these resolutions, we must first understand what a “trust” is.

In general terms, a “trust” is an economic and legal instrument, by means of which a separate wealth is created through the transfer of assets of the person who create it (the “settlor”), so that an administrator (the “trustee”) manage them on behalf of whoever is designated (the “beneficiary”).

Based on the above, the structure of the “trust” can be complex, depending on the type of goods and rights that are incorporated, whether it is revocable or not, discretionary or not, etc.

It is important to mention that this legal vehicle has not been recognized in Spain. Therefore, the treatment of “trusts” in our tax system is simplified to the fact that the relationships between the settlor and the beneficiaries through the “trust” are considered carried out directly. Basically, the figure of the “trust” is ignored.

This implies great problems and uncertainty regarding the possible tax implications, which we will try to summarize.

• Personal Income Tax. The obligation to pay this tax can be required to the beneficiaries or even the settlor, according to the legal nature of the taxable events.
• Net Wealth Tax. The taxable event is usually the ownership of assets and rights, so generally it will be the settlor who has obligations with respect to this tax.
• Form 720 of assets and rights abroad. In this case, apart from the ownership of the assets for the settlor, the beneficiaries of the “trust” may also be subject to the obligation to inform.
• Inheritances and Donations. Transfers of assets and rights from the settlor to the “trust”, as well as transfers of assets and rights in favor of the beneficiaries, according to the Spanish tax system are considered direct transfers from the settlor to the beneficiary. Based on this, it will generally be subject to Inheritance and Gift Tax, except in the case of legal entity beneficiaries are subject to corporate tax.

In short, the “trust” implies an endless number of possibilities that means having to analyze each case to correctly determine all the obligations.

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