Do the beneficiaries of a Trust created abroad by a grandmother, non Spanish resident, have to pay tax in Spain for the funds or assets they are from time to time receiving in Spain from that trust, why, how and when? (01/12/2009)

16 Dec Do the beneficiaries of a Trust created abroad by a grandmother, non Spanish resident, have to pay tax in Spain for the funds or assets they are from time to time receiving in Spain from that trust, why, how and when? (01/12/2009)

(From a recent binding official reply to a formal consultation made to the Spanish Central Tax Office)

The legal arrangement of the Trust is not recognized as such by the Spanish legal system. The Convention of The Hague internationally applicable to the Trust and its recognition has not been ratified by Spain. Therefore, in what refers to the Spanish legal system, the relations between the bequeather and his assignees through the Trust are considered as made directly between them directly.

The grandmother of the consulting parties, of Panamanian nationality, passed away in Madrid. Although she resided in that city for at least the last four years previous to her death, it does not show that she changed her fiscal address or that she formalized her domicile there. The bequeather had constituted a “trust” more than ten years ago in the island of Guernesey (United Kingdom), appointing her grandsons as beneficiaries of a series of assets of complicated quantification, being the grandmother the only beneficiary of that trust until her death. Up until this moment, her grandsons (the consulting parties) have not received any amount or asset from the trust.

In what refers to the trust, the faculties of the so-called “trustee” (administrator of the trust) are limited to the administration and safeguard of the funds received for the interest of the beneficiaries, he cannot have the funds for purposes different than the ones mentioned in the trust’s constitutional document (i.e. attention for the beneficiaries), also, in order to carry out certain acts of distribution he needs the authorization from certain people (“protectors”), and any positive or negative outcome obtained by the investment of the deposited funds is to be held on account of the trust. The “Trustee” turns out to be the formal proprietor of the funds, but he must keep them separated from his own patrimony.

Concerning the described facts, two questions are to be considered:

1. If the fact that the consulting parties have been appointed as beneficiaries of the trust by their grandmother with effects from her death constitutes a mortis causae acquisition, taxable by the Spanish Inheritance Tax – as the consulting parties understand – or if, on the other hand, they will have to pay tax for the amounts or assets that they are from time to time receiving from the trust like inter vivos gift acquisitions, which will be taxed with no favorable consideration about any existing kinship, since those amounts or assets come from the trust.

In this respect, although in the Anglo-American Legal system the trust is a typical institution that keeps a close relation not only with the Law of obligations and the one of property but, even, with the Family and Inheritance Law, the traditional legal areas for which the trust exists, the arrangement of the trust is not recognized by the Spanish legal System. Even so when there is an international legal text regarding this institution such as the Agreement or Convention of The Hague of 1-7-1985, about the law applicable to the trust and its recognition, that tries to eliminate or, at least, to simplify the problems derived from the ignorance of this institution in many legal systems. This Agreement had effect from 1-1-1992, but the number of ratifications by the different Countries has been very little. At the present time, only ten countries have ratified the Agreement, and, among them, it is not Spain. Therefore, in what refers to the Spanish legal system, the relations through the trust between the consulting parties and their grandmother are considered as made directly between one and others. For that reason, the appointment of the consulting parties as beneficiaries of the trust incorporated by their grandmother with effects from her death conforms the taxable deed regulated in the Inheritance and Donations Tax Law art.3.1.a, since it constitutes an acquisition of goods and rights through inheritance, legacy or any other inheritance title. The accrued income of the taxable deed is taking place at the moment of the death of the bequeather (art.24.1).

1. If the fact that the grandmother was not having her fiscal formal residency in Madrid, nor was she registered as having her domicile in that city, is a determining factor about the condition of fiscal resident in this territory in what refers to the Inheritances and Donations Tax.

In relation to this question, the Law establishes that the tax due to personal obligation is requested from the contributors who have their habitual residence in Spain, this one being determined according to, among other assumptions, the fact that the contributor has her habitual residence in Spanish territory when she remains in this territory more than 183 days during the natural year, computing the sporadic absences, unless the contributor credits her fiscal residence in another country. Therefore, the question about being or not habitual resident in Spain is a question that can really be proven by means of any permissible evidence accepted by Law. In this sense, the fact of the contributor having declared the fiscal address in Madrid or the fact of being registered in this municipality can constitute evidence in favor of the fiscal residence, and the absence of these circumstances, an evidence otherwise; but the indicated circumstances are neither necessary nor sufficient to credit the habitual residence, that can be justified by other means, and that will be determined in agreement with the joint valuation of the evidences contributed by the interested parties and the ones carried out by the Public Administration.

(From a recent binding official reply to a formal consultation made to the Spanish Central Tax Office)