Spain: The use of a Trust in civil law countries

I.- Concept of trust and its applicability in Spanish law

• The trust is a legal concept of Anglo-Saxon origin, widely used in common law systems, which poses challenges and peculiarities when analyzed from the perspective of Spanish law, a civil law system. In Spain, the trust does not have a direct regulation or an exact equivalent.
• The trust involves a fiduciary relationship in which a settlor transfers assets or rights to a trustee, who manages and/or disposes of them for the benefit of a beneficiary and/or potential beneficiaries or for a specific purpose.
• The Hague Convention on the Law Applicable to Trusts and their Recognition of 1 July 1985 is an international instrument that regulates the recognition of trusts created under the laws of common law countries. Spain has neither signed nor ratified this convention, which means that it is not obliged to recognize or regulate trusts created in accordance with other legislations due to the complexity of how they fit into the Spanish legal system.

II.- Tax treatment of trusts in Spain.

• Since the trust is not recognized in Spain, the tax administration considers that transfers of assets and rights carried out through a trust are carried out directly between the settlor and the beneficiaries, without taking into account the institution of the trust. This entails that, for tax purposes, the intermediation of the trustee is ignored, and the transactions are treated as if they were direct transfers from the settlor to the beneficiary/ies. In short, a kind of fiscal transparency applies.
• This has the following consequences :

(a) Personal Income Tax (IRPF).

The tax treatment of income generated by the trust depends on the relationship between the participants and the trust:

– Settlor:  If the settlor retains any control or benefit over the assets, the income earned by the trust may be considered to be attributable directly to him.

– Beneficiaries : When the income of the trust is distributed to the beneficiaries, they must be taxed on such income in Spain if they are tax resident in Spain. The nature of the income will determine its classification and the applicable tax rate.

(b) Inheritance and Gift Tax.

b.1.) Gifts:

If the beneficiaries (tax residents in Spain) receive assets or rights from the trust during the settlor’s lifetime, these may be taxed in Spain as a gift carried out directly by the settlor. This treatment may in certain cases be beneficial, as the tax law states tax reductions and/or exemptions for transfers carried out between relatives.

b.2.) Transfers mortis causa (Inheritance) :

The tax liability arises at the moment of the death of the settlor.

III.- Other legal obligations; KYC.

• Law 10/2010, of 28 April, on the Prevention of Money Laundering and Terrorist Financing, establishes the obligations of the regulated entities & individuals (among which Public Notaries & lawyers) to analyze complex ownership structures (being necessary to identify the Ultimate Beneficial Owner /UBO), affecting in particular the Trust.
• Under Spanish law, the beneficial owner is the natural person who directly or indirectly owns or controls a structure or disposition of assets. In the case of a Trust, it shall be necessary to identify:

 The settlor

 The trustees.

 The beneficiaries or class of beneficiaries.

 Any other person exercising effective control over the trust.

• Regulated entities (notaries, lawyers, etc.) should take enhanced due diligence measures when they detect that a Trust is involved in a transaction, especially if it is domiciled in high-risk jurisdictions.