The Spanish legal system is rooted in Civil Law (Roman-Germanic tradition), where legislation is the primary source of law, unlike the Common Law system, which relies heavily on judicial precedents. This fundamental difference means that several tax structures widely used in Common Law countries lack direct legal recognition or exact counterparts in Spain, creating unique challenges in their tax treatment.
1. Trusts
No legal recognition: The concept of a “trust” does not exist as a legal entity in Spanish law. Spain has not ratified the 1985 Hague Convention on the Law Applicable to Trusts and their Recognition.
Fiscal transparency approach: The Spanish Tax Agency tends to ignore the trust as a separate entity for tax purposes. Instead, the transactions and assets held in a trust are attributed directly to the settlor or the beneficiaries, depending on who exercises control or receives the benefit.
The Dirección General de Tributos (DGT) and the Central Economic-Administrative Court (TEAC) consistently apply a “substance-over-form” doctrine. This means that trusts are often fiscally invisible and that income or assets are directly assigned to the party with economic control.
Relevant binding rulings: Resolutions such as V0811-09, V0980-09, V2226-09, V2808-15, and V2317-19 all reaffirm this transparent treatment of trusts in relation to income tax, wealth tax, and inheritance/gift tax, depending on the circumstances of control and benefit.
TEAC resolutions: Case RG 00-00898-2011 emphasized that transfers from settlor to beneficiaries are treated as donations or inheritance, taxable under the Spanish Inheritance and Gift Tax (ISD). RG 00-01977-2012 reiterated this doctrine.
2. Limited Liability Partnerships (LLPs)
Lack of equivalent legal entity: Spain does not offer an exact equivalent to the LLP structure found in Common Law jurisdictions, where all partners have limited liability. While Spain recognises entities like SL (Limited Liability Company) and SA (Public Limited Company), it lacks a model where all partners are protected without exception.
Tax implications: LLPs may be treated as either corporate taxpayers under Spain’s Corporate Income Tax or under a transparent tax regime depending on whether they are considered legal entities in their country of origin. This classification affects whether income is taxed at the entity level or attributed to individual partners.
Key rulings: DGT decisions like V1816-09, V0790-10, and V2314-11 analyse whether LLPs from countries like the UK or the US are taxable entities or fiscally transparent. If they are subject to corporate tax abroad, Spain generally treats them as corporate taxpayers too. Otherwise, income is attributed to members.
3. Charities and Endowments from Common Law Jurisdictions
Spanish foundations vs. foreign charities: Spain’s Law 49/2002 governs tax-exempt foundations that serve public interest. However, foreign charities or endowments might not meet the structural or regulatory requirements needed for this status.
Differences in oversight and requirements: Spanish foundations must allocate most of their income to charitable purposes and are closely monitored by a state body (Protectorado). In contrast, many Common Law charities may have more operational flexibility and less stringent reporting obligations.
Tax treatment: Foreign charitable entities wishing to operate in Spain or benefit from tax exemptions must meet all criteria set out by Law 49/2002. This includes non-distribution of profits, pursuing general interest purposes, and being subject to equivalent supervision abroad.
Key rulings: DGT consultation V0685-11 evaluated whether a UK charity could access tax exemptions under Spanish law. Similarly, V1502-12 analysed a nonprofit foreign entity’s compliance with Spanish regulations. In both cases, strict compliance with Spanish standards was required.
Conclusion
The intersection between the Common Law and Spanish Civil Law systems introduces significant complications in tax matters. Structures such as trusts, LLPs, and foreign charitable entities often face unexpected fiscal consequences in Spain due to the lack of direct legal recognition. Therefore, it is crucial for investors, family offices, and international companies to conduct a case-by-case analysis to ensure tax compliance.
At Resitax, we specialise in international tax advisory and help clients navigate cross-border tax complexities between Common Law jurisdictions and Spain.
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