Taxation of Discretionary Trusts in Spain

Spain does not recognise the common-law trust as a legal person, but the Spanish tax system still needs to decide who pays tax on the income and value that sit inside a trust and who is taxed when money comes out. With discretionary trusts, the answer depends on control, rights, and facts. The Spanish tax authorities typically “look through” the trust to identify the real taxpayer among the settlor, the beneficiaries, or, in limited cases, an underlying holding entity. For residents in Spain, this creates complex interactions across income tax, wealth tax, and inheritance and gift tax. Understanding the framework and documenting roles is essential before you settle, receive, or restructure a trust if you live in Spain or plan to move here.

How Spain Classifies Discretionary Trusts

Because the trust is not a separate civil-law person, Spain analyses function over form. Where the settlor retains powers to revoke, substitute trustees, or dictate distributions, the trust is often treated as an extension of the settlor. Where the trustee holds full independence and the beneficiaries have only a discretionary expectancy rather than a fixed right, Spain usually taxes the actual person who ultimately controls or receives the value. This classification is not cosmetic; it determines whether income is imputed annually to a person in Spain or only taxed upon distribution, and whether the assets appear in a Spanish resident’s wealth tax base.

Who Is Taxed On Trust Income

If the trust is effectively “grantor-like,” meaning the settlor retains substantial powers, Spanish residents who are settlors can be taxed as if they directly owned the trust assets and earned the trust income. That means interest, dividends, rental income, or capital gains are recognised each year according to their category under Spanish rules, regardless of whether the trustee distributes the proceeds. If the trust is truly discretionary with independent trustees and no reserved powers, Spain usually waits to tax residents when a distribution is made to a beneficiary. In that case, Spain re-classifies the payment by looking at the underlying income and gains accumulated in the trust rather than simply treating it as a generic distribution. The same approach applies to non-resident settlors or beneficiaries when the trust holds Spanish-source assets; in that case the non-resident income tax rules can come into play.

Wealth Tax And Ownership Of Trust Assets

Wealth tax is assessed on 31 December by reference to who owns or controls assets. If a Spanish resident settlor retains powers indicating continued ownership, the trust assets may be included in the settlor’s wealth tax base. If the settlor has given up meaningful control and the beneficiaries have only discretionary expectancies with no enforceable right, the assets are typically not included in a beneficiary’s wealth tax base until a distribution gives them ownership. Regional exemptions and thresholds vary, so even when assets are included, the final wealth tax bill can differ depending on where you live in Spain.

Inheritance And Gift Tax On Transfers To Or From The Trust

A transfer by an individual into a trust can be a taxable gift for Spanish purposes if the settlor is resident in Spain or the assets are located in Spain, even if the trust is governed by foreign law. When the settlor dies, Spain examines whether the trust functioned as a will substitute. If so, a later appointment of assets to a beneficiary can be treated as an inheritance taxable to that beneficiary. The applicable region and relationship scale influence the effective rate and allowances. Because discretionary appointments are, by definition, not fixed, each distribution event may be tested for gift or inheritance tax depending on the settlor’s status and timing.

Taxation Of Distributions To Spanish Residents

When a Spanish resident beneficiary receives a distribution from a discretionary trust, Spain looks through the payment. If the distribution is funded from the trust’s accumulated income, Spain generally taxes the beneficiary according to the income category: savings income for interest and dividends, real estate income for rents, or capital gains for asset disposals. If the trustee distributes original capital contributed by the settlor, the payment may not be income but could trigger gift tax depending on who the settlor is and the circumstances. The key is to maintain proper trust accounts that track the character of income and principal so the beneficiary can prove what is being distributed in a Spanish assessment.

Anti-Avoidance And Low-Tax Structures

If a trust structure interposes low-tax entities or channels income to beneficiaries in a way that Spain perceives as avoiding tax, look-through and anti-avoidance principles can attribute income back to the person in Spain who effectively controls or benefits. While Spain’s controlled foreign company regime focuses on companies, similar reasoning is used to prevent deferral through trust layers. The pattern is consistent: substance, governance, and documentation matter more than labels.

Treaty Relief And Foreign Tax Credits

Double tax treaties can reduce Spanish tax on certain income realised in the trust, such as foreign dividends or interest, if tax has been paid abroad and the beneficiary or settlor is the person entitled to treaty benefits. Spain usually grants foreign tax credit to the person taxed in Spain, up to the Spanish tax on that same income. Careful alignment of who is considered the beneficial owner under treaty concepts with the Spanish taxpayer of record is necessary. Without records that trace source-country tax to specific items of trust income, credit can be lost.

Reporting And Compliance In Spain

Spanish residents must disclose foreign assets on the informative return for overseas assets when thresholds are met. Depending on the trust’s holdings, that can include bank accounts, securities, and real estate held by the trustee. In practice, the person treated as the owner for wealth tax is usually the declarant for reporting. Beneficiaries who merely hold a discretionary expectancy may still need to report if they are considered ultimate beneficial owners of specific accounts or companies held within the trust. Distributions are reported in the annual income tax return, and any gift or inheritance tax resulting from appointments must be filed within the relevant statutory periods.

Practical Planning For Settlors, Trustees, And Beneficiaries In Spain

If you are moving to Spain with a pre-existing discretionary trust, the first step is an audit of the trust deed, powers, letter of wishes, and trustee minutes. Map where control sits and whether the settlor has reserved powers that could result in annual attribution in Spain. If you are a Spanish resident beneficiary, insist on trust accounting that cleanly distinguishes capital from income and identifies the source and character of any distribution. If a contribution to the trust might be treated as a gift in Spain, assess whether staggered funding, regional exemptions, or treaty protections change the outcome. Where family members span multiple jurisdictions, coordinate timing so a distribution or appointment does not inadvertently create gift or inheritance tax exposure in Spain because of the settlor’s residence or the location of assets.

Conclusion

Discretionary trusts and Spain can coexist, but only with meticulous structuring and evidence. Spain will not respect a legal shell that obscures who really controls or enjoys the assets. Before you settle, appoint, or distribute, test your facts against Spanish income, wealth, and transfer tax rules, make sure your records align, and work with a tax lawyer in Spain who routinely defends trust cases before the tax authorities. The goal is certainty: you want Spain to tax the right person, at the right time, on the right amount.