Trusts and Foreign Structures: Spanish Tax Treatment for US and UK Clients

The trust is a common law concept that does not exist in Spanish civil law. Spain's legal system does not have a mechanism for separating beneficial from legal ownership in the way that common law trusts do. As a result, Spain takes a "look-through" approach to trusts — it looks past the trust structure and attributes the trust's assets and income directly to the grantor or beneficiaries, depending on the type of trust and the circumstances.

This creates significant complexity for US clients with revocable living trusts, UK clients with discretionary family trusts, and any international client with assets held in offshore structures or foundations. The key question Spain asks is: who is the real economic owner of the income and assets? The answer determines the Spanish taxpayer and the applicable tax.

Article 91 LIRPF: CFC-Style Attribution

Article 91 of the Spanish Personal Income Tax Act applies CFC (Controlled Foreign Corporation) -style attribution rules to foreign entities and arrangements — including trusts — where a Spanish resident has effective control or is deemed the economic owner. Under Article 91, income earned by a foreign structure can be attributed directly to the Spanish resident member, even if the income has not been distributed, if the foreign entity pays less than 75% of the equivalent Spanish tax on that income.

For trusts, Spain analyses the nature of the arrangement: if the grantor retains meaningful control over the trust assets (as in most US revocable trusts), Spain attributes the trust income to the grantor. For discretionary trusts, Spain may attribute undistributed income to the settlor under Article 91 or to beneficiaries on distribution — depending on the level of Spanish residency and the trust's degree of autonomy from the settlor.

IRNR vs IRPF: Which Tax Applies?

The applicable Spanish tax depends on the residency of the person to whom trust income is attributed. If the attributed person is a Spanish tax resident, the income falls within IRPF (personal income tax) at progressive rates. If the attributed person is a non-resident, Spain's IRNR (Non-Resident Income Tax) may apply to Spanish-source income only — at flat rates (typically 19% for EU/EEA residents, 24% for others on most income types).

This distinction matters enormously for planning: the residency status of the grantor and/or beneficiaries at the time income arises determines the applicable tax regime.

Spanish tax residents who are grantors, beneficiaries or trustees of a foreign trust must declare the trust's assets in the Model 720 informative declaration, where those assets fall within the three reporting categories (bank accounts, securities/financial assets, real estate) and the value in each category exceeds €50,000.

For a grantor trust, the assets are treated as directly owned by the grantor for Model 720 purposes. For a discretionary trust, the treatment depends on the nature of the beneficial interest. In either case, the prudent approach is to seek specific advice on whether and how the trust assets must be reported.

The Post-ECJ 2022 Penalty Reform

Prior to 2022, Spain's Model 720 penalty regime was extreme: the penalty for failing to declare a foreign asset was 150% of the value of the undeclared asset, with no statute of limitations. In February 2022, the European Court of Justice ruled that this regime violated EU law on free movement of capital. Spain subsequently reformed the penalties to bring them into line with equivalent domestic penalties.

However, the filing obligation itself remains. Failing to declare trust assets that should be reported can still result in administrative fines, late filing surcharges and — most significantly — the risk that undeclared assets are deemed to be "unjustified capital gains" if discovered, taxed at the highest IRPF rate plus substantial late interest charges.

Distributing Before the Move

If you are planning to move to Spain and have a discretionary trust, distributing accumulated trust income to beneficiaries before the move (while they are not yet Spanish residents) can prevent that income from becoming subject to Spanish IRPF. Once you are a Spanish resident, undistributed trust income may be attributed to you annually under Article 91.

Trust Restructuring

In some cases, restructuring a revocable grantor trust before arriving in Spain — for example, converting to an irrevocable trust with genuinely independent trustees — can remove the automatic attribution of trust income to the grantor. However, this must be done well in advance of establishing Spanish residency, and the transaction itself may trigger US or UK tax consequences that must be analysed first.

Family Foundation Alternatives

In certain circumstances, a Spanish private foundation (fundación privada) or a regulated corporate holding structure may offer a more tax-efficient alternative to continuing to hold assets through a foreign trust. The right answer depends on the nature of the assets, the family's long-term goals and the applicable DTA provisions.

Treaty Analysis

Some of Spain's DTAs include specific provisions addressing the treatment of trusts. The US-Spain treaty is silent on trusts as a general matter, but the OECD Commentary on Article 1 (persons covered) and Article 4 (residence) provides guidance on when a trust can be treated as a resident of either contracting state. We analyse the applicable treaty provisions for each client's specific trust structure.