An anonymised case study: a Jersey discretionary trust holds a Tenerife property through a Panama company and a Spanish SL. What are the annual tax costs, the hidden 3% levy trap, the exit tax burden, and which structure actually minimises exposure?
Many wealthy non-residents instinctively reach for offshore structures when they acquire Spanish real estate. A trust in a low-tax British Crown Dependency, a Panama company in between, a local Spanish shell at the bottom of the chain — the rationale is familiar: privacy, estate planning simplicity, and the hope of managing the eventual capital gain. The reality, particularly after Spain tightened its anti-avoidance rules and joined the Common Reporting Standard (CRS), is rather different. This article uses a fully anonymised case study to walk through every layer of the analysis: what obligations arise, where the traps lie, and what a genuinely efficient structure looks like.
The trustee has asked for advice on two questions: first, whether this is a tax-efficient structure for a non-resident trust to hold Spanish real estate; and second, what ongoing Spanish tax obligations arise. The short answer to the first question is: it depends on the layer you examine. The Panama company introduces a specific annual levy that many advisers overlook. The article below explains why — and what the alternatives offer.
Before reaching the tax analysis, it is necessary to address a fundamental point of Spanish property law. Spain is a civil law jurisdiction. Its property registration system — the Registro de la Propiedad — operates on the principle of unified legal ownership: a registered owner either owns an asset outright or does not. Spanish law has not ratified the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition. There is no domestic equivalent of the common law trust, and no mechanism in the registry for recording title "as trustee".
The practical consequence is significant: if a trustee attempts to register title to a Spanish property in their capacity as trustee, the Registro de la Propiedad will register them as an individual full legal owner, with no annotation of the trust relationship. This creates a serious problem. If the trustee develops personal financial difficulties, the property appears on the face of the register as the trustee's personal asset and could in principle be seized by the trustee's personal creditors. The trust beneficiaries would have no registered protection.
There is a secondary problem: succession. When the trustee dies or retires, the legal mechanism for transferring title is a Spanish conveyance, which attracts transfer taxes and notary costs. A properly structured holding entity — a Spanish SL or a recognised foreign company — avoids this by ensuring that the property never changes hands directly; instead, the shares of the holding company change hands.
The solution adopted in the Andromeda Trust structure — holding through Canaries Properties SL — is therefore legally sound as far as Spanish property law is concerned. The Spanish SL is a recognised legal entity, it can register title in the Registro de la Propiedad in its own name, and it can be capitalised, transferred and wound up within ordinary Spanish company law. The question is whether the particular combination of layers above the SL is fiscally efficient.
To answer the trustee's question properly, we need to analyse four distinct structures for holding the Tenerife property and compare them on the key Spanish tax dimensions: acquisition tax, annual imputed income tax, annual wealth tax, exit (capital gains) tax, and any special levies.
In this scenario, the trustee (a Swiss professional trustee company) registers directly as owner in the Registro de la Propiedad, with the trust entirely invisible to the register. For Spanish tax purposes, the owner is a non-resident individual or legal person.
On acquisition, the applicable transfer tax in the Canary Islands is the Impuesto sobre Transmisiones Patrimoniales (ITP) at 6.5% of the purchase price. On an €800,000 property, this amounts to €52,000 at acquisition.
For annual imputed income, a non-resident owning a residential property that is not let produces "imputed income" (renta imputada) under the Impuesto sobre la Renta de No Residentes (IRNR). The imputed income base is 1.1% of the cadastral value (or 2% if the cadastral value has not been updated in the last 10 years). At a 24% IRNR rate (applicable to non-EU/EEA residents — Swiss residents do not qualify for the EU 19% rate), the annual cost on a property with a cadastral value of, say, €400,000 would be: €400,000 × 1.1% × 24% = €1,056 per year. This is modest in absolute terms but must be filed annually on Modelo 210.
Wealth tax (Impuesto sobre el Patrimonio) applies to non-residents holding Spanish assets. A non-resident's taxable base for Spanish wealth tax is the value of all Spanish-situated assets. For the Tenerife property, the taxable value is the greater of the acquisition cost (€800,000), the cadastral value, and the value assessed by the tax authorities. Progressive wealth tax rates apply (0.2%–3.5% depending on net wealth bracket), subject to a €700,000 allowance. There is no automatic bonification for non-residents in the Canary Islands.
On sale, the gain is subject to IRNR at 24% for non-EU/EEA residents. The buyer is required to withhold 3% of the purchase price and pay it to the AEAT on Modelo 211, as an advance payment against the seller's capital gains liability. The seller then either claims a refund if 3% exceeds the actual IRNR due, or pays the balance.
The fundamental problem with Option A — beyond the legal exposure described above — is that there is no separation between the trust assets and the trustee's personal exposure. It is not a viable option for any professionally structured trust.
This is a variant of the Andromeda Trust structure in which Pacific Holdings SA (Panama) owns the Tenerife property directly, without a Spanish SL interposed. This is the scenario that triggers the most dangerous Spanish tax trap for offshore structures.
Under Article 40 of the Ley del Impuesto sobre la Renta de No Residentes (LIRNR), a special annual levy applies to non-resident companies that hold Spanish real estate. The "Gravamen especial sobre bienes inmuebles de entidades no residentes" imposes a charge of 3% of the cadastral value, payable annually, on companies resident in territories that do not have an effective exchange of information agreement with Spain.
Panama is not on Spain's list of approved exchange-of-information territories. Panama has not signed an information exchange agreement with Spain (and as of 2025 remains on Spain's list of territories with limited cooperation for these purposes). This means that Pacific Holdings SA, if it owned the Tenerife property directly, would be subject to the 3% annual levy. On a cadastral value of €400,000, this amounts to €12,000 per year — in addition to all other taxes. Over 10 years, this levy alone would cost €120,000, entirely separate from the property's actual income or gain.
Beyond the special levy, a Panama company owning Spanish property directly also faces: (i) IRNR on imputed income at 24%; (ii) annual Spanish wealth tax obligations on the value of the Spanish assets; and (iii) scrutiny from the AEAT under the beneficial owner disclosure rules. Panama's opacity for corporate ownership means the AEAT will apply maximum scrutiny to any transaction involving a Panamanian entity.
A Spanish Sociedad de Responsabilidad Limitada (SL) incorporated specifically to hold the property is one of the most commonly used structures for non-resident property investors. This is the layer represented by Canaries Properties SL in the Andromeda Trust structure.
The key advantages are clear. Because the SL is a Spanish tax resident entity, it is subject to the Impuesto sobre Sociedades (IS — corporate income tax at 25%) rather than IRNR. Critically, the 3% annual levy does not apply: that levy is targeted at non-resident entities. A Spanish SL is a Spanish resident company, regardless of who owns its shares.
Annual corporate tax treatment of a property held for personal use by shareholders: under Article 10 of the Ley del Impuesto sobre Sociedades (LIS), the SL must compute deemed income from a property used by its shareholders or related persons. The deemed income base is 6% of net book value per year (or 10% if the property was acquired by non-monetary contribution). On a property with net book value of €800,000, this produces deemed income of €48,000 per year, taxed at 25% = IS of €12,000 annually. This is comparable in cost to the 3% levy on the Panama structure, but is at least computed on net book value (which decreases as the property depreciates) rather than on cadastral value (which can be updated upwards by the authorities).
The SL also provides a clean corporate succession mechanism: shares in the SL can be transferred between trust entities or beneficiaries without any direct change to the property title registration, avoiding transfer taxes at that level.
The disadvantage of a pure Spanish SL structure with no intermediate holding company is the dividend question: if the SL distributes a dividend to its parent (whether that is the Panama company, the trust directly, or some other entity), the AEAT will apply a 19% IRNR withholding tax on the dividend, unless a double tax treaty (DTT) provides a lower rate. The interaction with a DTT depends on who the direct shareholder is.
The structure actually used by the Andromeda Trust — Panama company owning a Spanish SL, which owns the property — occupies an interesting middle ground. It avoids the 3% annual levy (because the registered property owner is the Spanish SL, not the Panama company), but adds corporate maintenance complexity and introduces a dividend withholding problem at the SL-to-Panama level.
Because Panama has no double tax treaty with Spain, dividends paid by Canaries Properties SL to Pacific Holdings SA attract 19% IRNR withholding (the domestic IRNR rate on dividends from non-treaty countries). On any distribution, the Spanish SL must withhold 19% and pay it to the AEAT on behalf of Pacific Holdings SA. Pacific Holdings receives only 81 cents on every euro distributed. There is no treaty relief mechanism available to reduce this rate.
Furthermore, since Panama is an opaque jurisdiction, any transaction involving distributions to Pacific Holdings SA will attract heightened AEAT scrutiny. The AEAT may request beneficial owner disclosure, invoking Directive 2011/16/EU's automatic exchange provisions (which operate through Spain's bilateral arrangements even with non-EU entities) and CRS data received from Jersey (the trust's jurisdiction).
| Tax Dimension | Option A: Direct Trustee | Option B: Panama Co. Direct | Option C: Spanish SL Only | Option D: Panama + Spanish SL (Current) |
|---|---|---|---|---|
| Acquisition Tax (ITP) | 6.5% (Canary Islands) = €52,000 | 6.5% = €52,000 | 6.5% = €52,000 | 6.5% = €52,000 (same) |
| Annual Imputed Income Tax | IRNR 24% × 1.1% × cadastral value | IRNR 24% × 1.1% × cadastral value | IS 25% × 6% net book value (deemed income) | IS 25% × 6% net book value (SL level) |
| 3% Annual Levy (Art. 40 LIRNR) | N/A — individual owner | YES — 3% of cadastral value annually (Panama is non-cooperative) | NO — Spanish SL is resident entity | NO — property owner is the Spanish SL |
| Annual Wealth Tax (IP) | Yes — on property value | Yes — on property value (via company) | Yes — on SL shares if real-estate-rich | Yes — on SL shares (indirect) |
| Capital Gains on Sale (property level) | 24% IRNR (non-EU/EEA) + 3% retention | 24% IRNR at company level + no treaty | 25% IS at SL level; then dividend WHT | 25% IS at SL level; then 19% WHT to Panama — no treaty relief |
| Dividend Withholding (on distribution) | N/A | N/A | 19% IRNR (no DTT in this structure) | 19% IRNR (Spain–Panama: no DTT) |
| Legal Protection of Trust Assets | None — trustee appears as personal owner | Panama company isolates property | Spanish SL provides corporate veil | Double corporate veil |
| AEAT Transparency Risk | Medium | High — Panama opacity | Medium | High — Panama layer triggers scrutiny |
| Corporate Maintenance Cost | Nil | Panama annual costs | Spanish SL annual compliance | Both Panama and Spanish SL annual costs |
| Overall Verdict | Not viable (legal risk) | Very inefficient (3% levy + opacity) | Most efficient corporate option; some exit complexity | Avoids 3% levy but adds WHT and maintenance cost |
The Andromeda Trust has an important characteristic that simplifies the Spanish tax analysis considerably: none of the trust parties — the settlor (Mrs. Costa), the trustee, or the discretionary beneficiaries (Carlo and his family) — are Spanish tax residents. All are Swiss residents. This means that Spain's taxing jurisdiction is limited to Spanish-source income and Spanish-situated wealth. There is no IRPF in play, and no Modelo 720 filing obligation (which applies only to Spanish tax residents).
As a non-resident of Spain, Mrs. Costa is not subject to Spanish personal income tax on worldwide income. Spain can only tax her on income sourced in Spain or on the value of Spanish-situated assets. If, under any applicable attribution analysis, the Tenerife property's imputed income were attributed to her personally (rather than to the trust or its entities), she would have an IRNR filing obligation on Modelo 210. However, in the Andromeda Trust structure, the property is held through two interposed legal entities (the Panama company and the Spanish SL), and Mrs. Costa's relationship to those entities is as settlor and potential beneficiary of a discretionary trust — she has no direct entitlement to the property or its income. Attribution to her personally would require the AEAT to pierce both corporate veils and the trust structure simultaneously, which would require specific anti-avoidance findings.
That said, the AEAT's anti-avoidance tools have grown considerably stronger. Under Real Decreto 1080/1991 and subsequent amendments, Spain designates certain territories as "territories without effective exchange of information" — a category that includes Panama. Transactions with Panamanian entities are subject to enhanced scrutiny, mandatory documentation requirements, and may be recharacterised if the primary purpose of the structure is tax avoidance without genuine economic substance. If Pacific Holdings SA has no staff, no premises, and no operational activity in Panama (which is typical), the AEAT may argue that it lacks economic substance and disregard it for Spanish tax purposes.
As Swiss residents, Carlo and his family are not Spanish taxpayers in respect of their worldwide income. Spain can only impose tax on Spanish-source income they actually receive. A discretionary beneficiary has no current entitlement to trust income; they receive distributions only at the trustee's discretion. Accordingly, no Spanish tax obligation arises for Carlo or his family unless and until the trust actually distributes income to them that is sourced in Spain, or unless they themselves acquire Spanish tax residency.
Should they receive a distribution attributable to Spanish-source rental income or capital gains from the Tenerife property, that distribution would potentially be subject to IRNR as income from a Spanish source — though the precise characterisation (and whether the trust itself discharges the IRNR at the entity level first) is a complex multi-layer analysis.
The trustee acts in a fiduciary capacity. As a legal entity incorporated and resident in Switzerland, it is not a Spanish tax resident. Its Spanish tax obligations are procedural: as the controlling entity behind entities with Spanish obligations, the trustee (or its agents) must ensure that the Spanish SL's annual IS returns are filed, that IRNR obligations on the SL's deemed income are met, and that any wealth tax filings are completed. The trustee bears no personal Spanish tax liability provided it does not cross the threshold of having a permanent establishment in Spain.
Even with multiple legal layers, the Spanish tax authority has increasingly effective tools for looking through complex offshore structures. The concept of "economic substance" — derived from both BEPS Action 5 (harmful tax practices) and the EU Anti-Tax Avoidance Directives (ATAD I and II, transposed into Spanish law) — requires that an entity actually carry out real economic activity in its jurisdiction of residence. A Panamanian company that exists solely to hold shares in a Spanish SL, has no employees, no premises, and no independent commercial activity, is highly vulnerable to being characterised as a "mere holding entity" with no substance.
The AEAT increasingly cross-references CRS (Common Reporting Standard) data. Jersey — the jurisdiction of the Andromeda Trust — is a CRS-participating jurisdiction. Jersey financial institutions are required to report information about financial accounts held by non-resident individuals and entities to the relevant tax authorities. Switzerland participates in CRS. The AEAT will receive, via the CRS data exchange chain, information about the Andromeda Trust's financial assets, including its ownership of Pacific Holdings SA and, through it, the Tenerife property.
BEPS Action 3 addresses controlled foreign company (CFC) rules. Spain's CFC rules (Article 100 LIRPF, applicable to Spanish tax resident individuals) would not apply to the Andromeda Trust parties since none are Spanish residents. However, the anti-hybrid rules (transposing ATAD II, Articles 15bis and 15ter of the Ley del Impuesto sobre Sociedades) may interact with the trust structure if any of the beneficiaries later move to Spain.
Spain's exit tax rules (Articles 95bis LIRPF and 19 LIS) apply when Spanish tax residents relocate abroad, imposing a deemed disposal of shares. Conversely, if any of the beneficiaries were to move to Spain in the future, the unrealised gain in the Tenerife property (held through the SL and the Panama company) could be relevant on entry, since Spain does not provide a "step-up" in cost basis for assets held before Spanish residency begins.
Assuming the current Andromeda Trust structure (Panama company holding the Spanish SL, which holds the Tenerife property) is maintained, the following ongoing Spanish tax obligations apply every calendar year.
As a Spanish tax resident company, Canaries Properties SL must file an annual IS return (Modelo 200) by 25 July following the close of the fiscal year (which for most Spanish companies is the calendar year). The company must compute deemed income from the personal use of the Tenerife property at 6% of net book value per year (or 10% if the property was contributed in kind), and apply the 25% IS rate. The company also has quarterly advance payment obligations (Modelo 202 in April, October, and December) if its prior year IS liability exceeded €0.
In addition to (or instead of, depending on the characterisation) the IS analysis, non-resident entities holding Spanish residential property must consider the IRNR imputed income return. However, since Canaries Properties SL is a Spanish resident company, the IRNR framework does not apply at the SL level. The IRNR obligation arises at the level of the non-resident entity — Pacific Holdings SA — only if it is treated as the direct economic owner of the property, which would occur if the Spanish SL is disregarded. Under the current structure, assuming the SL is respected as a genuine interposed entity, the IRNR imputed income obligation is subsumed within the IS filing at SL level.
Critically, if Pacific Holdings SA were ever found to hold the property directly (e.g., following an AEAT challenge to the SL's substance), it would face IRNR imputed income filing by 31 December each year, plus the 3% annual levy filing on Modelo 213.
Non-residents with Spanish assets must file Modelo 714 (the annual wealth tax return) if the value of their Spanish assets exceeds €700,000, or if the wealth tax due (before allowances) exceeds €0. The filing deadline is in June for the preceding tax year. For a non-resident trust structure, the taxable asset is the value of the Spanish-situated property, assessed as the greater of: (i) the acquisition price, (ii) the cadastral value, and (iii) the value verified by the tax authorities in a previous procedure. On a property purchased for €800,000, wealth tax will be payable even after the €700,000 allowance — on the excess of €100,000, progressive wealth tax rates apply.
The wealth tax is calculated at the Canary Islands level and the autonomous community of the Canary Islands applies the state rate without bonifications for non-residents (who do not qualify for the Madrid-style 100% bonification). At the marginal rate applicable to the €100,000 tranche, the annual wealth tax exposure is modest but not negligible.
Canaries Properties SL must maintain its commercial registration with the Registro Mercantil, file annual accounts, and maintain a registered address with a domicile fiscal in Spain. The administrative costs of maintaining a dormant SL (audit waiver available for small companies) are manageable but not zero: accounting fees, annual accounts filing, IS return preparation, and registered address typically cost between €2,000 and €5,000 per year for a dormant SL holding a single asset.
When the Tenerife property is eventually sold, the tax consequences flow through several layers. Understanding the effective total tax cost on exit is critical for any investment decision.
The gain within Canaries Properties SL is the difference between the sale price and the SL's tax book value of the asset (which is cost less accumulated depreciation). A residential property held as a fixed asset is depreciated at 3% per year under Spanish IS rules. On a property purchased for €800,000 in 2020, accumulated depreciation over five years at 3% would be €120,000, reducing the tax book value to €680,000. If the property sells for €1,000,000, the gain at SL level is €320,000, subject to IS at 25% = €80,000 in IS. The SL retains €240,000 of post-tax gain.
The buyer of the property is legally required to withhold 3% of the gross purchase price and pay it to the AEAT on Modelo 211 as an advance payment against the SL's capital gains liability. On a €1,000,000 sale, the buyer withholds €30,000. This is then offset against the SL's IS liability. If the IS due (€80,000) exceeds the retention (€30,000), the SL must pay the €50,000 balance directly. If the retention exceeds the IS (rare at current property price levels), the SL can claim a refund.
Once the SL has paid IS on the gain and retains the net €240,000 (in this example), it may distribute this as a dividend to its sole shareholder, Pacific Holdings SA. Spain applies 19% IRNR withholding on dividends paid to non-resident companies, absent a DTT providing a lower rate. Spain and Panama have no double tax treaty. The 19% withholding applies in full: Pacific Holdings SA receives €240,000 × 81% = €194,400.
The effective combined tax rate on the exit at the Spanish level is therefore: IS at SL level (€80,000) plus WHT on dividend (€45,600) = €125,600 on a gain of €320,000 — an effective rate of approximately 39.25%. If the full €320,000 gain is compared against the total sale proceeds distribution reaching Pacific Holdings SA (€194,400 net of both taxes), the leakage is substantial.
If the buyer is willing to acquire the shares of Canaries Properties SL rather than the property itself, the structure changes. A sale of shares in a Spanish SL by a non-resident company (Pacific Holdings SA) is subject to IRNR on any gain attributable to Spanish real estate. Under Article 13 LIRNR, gains on the sale of shares in Spanish companies whose assets consist primarily of Spanish real estate are deemed to be Spanish-source income, subject to IRNR. This is Spain's implementation of the "real property company" rule that features in virtually all modern tax treaties. The result: a share sale does not avoid Spanish tax on the underlying real estate gain.
Furthermore, from the buyer's perspective, acquiring an SL with unknown historical liabilities (deferred IS, employment obligations if any staff ever existed, historical filing omissions) carries legal risk that most buyers price in as a discount or prefer to avoid entirely by buying the property directly.
Based on the full analysis, the following planning positions emerge for the Andromeda Trust structure and for non-resident trust structures holding Spanish real estate more generally.
The current structure (Panama company over Spanish SL over property) is legally functional but not optimal. The primary inefficiencies are: (i) the absence of a DTT between Spain and Panama, creating a 19% dividend withholding trap on any distribution from the SL to Pacific Holdings SA; (ii) the enhanced AEAT scrutiny triggered by the Panamanian layer; and (iii) the double corporate maintenance cost. The 3% annual levy has been successfully avoided by interposing the Spanish SL — this is the structure's main tax advantage.
Consider whether the Panama company layer serves a genuine purpose. If its only function is to hold the Spanish SL, a restructuring — replacing Pacific Holdings SA with an EU or EEA resident company, or a company resident in a jurisdiction with a DTT with Spain — would reduce the dividend withholding tax rate. For example, a Luxembourg holding company would benefit from the EU Parent-Subsidiary Directive, reducing the dividend withholding tax to 0% on qualifying distributions (subject to meeting the 10% shareholding and 12-month holding period conditions). A Jersey company (in the trust's own jurisdiction) would not qualify for EU directive benefits, but Jersey has a DTT with Spain that may provide a reduced rate — specific analysis is required.
If the property is purely for holiday use by the trust's beneficiaries, the most tax-efficient structure from a Spanish perspective is direct ownership by an EU or EEA resident individual. An EU or EEA resident non-domiciled in Spain pays IRNR at 19% (not 24%), has no exposure to the 3% annual levy, and faces 19% capital gains tax on sale (not 24%). Corporate structures add annual tax costs (IS on deemed income, corporate maintenance) without reducing the effective rate, unless the holding period is very long and the asset is managed professionally.
Since the Andromeda Trust's beneficial owners are Swiss, not EU/EEA residents, the 19% rate is not available. The choice is effectively between: paying 24% IRNR with direct ownership (maximum simplicity) or managing through a Spanish SL (annual IS on deemed income, 25% IS on gain, 19% WHT on dividend to parent) and accepting that the total exit cost will be higher in the corporate structure. The corporate structure may still be preferred for succession reasons (avoiding Spanish inheritance tax on direct property ownership by a Swiss resident) and for privacy.
Jacob Salama advises professional trustees, family offices, and non-resident owners on structuring Spanish real estate acquisitions, ongoing IRNR and IS obligations, and exit planning. Avoid the 3% levy trap before it starts costing you.