In binding ruling V0781-16, of 25 February 2016, the Spanish Directorate-General for Taxes (DGT) analyses what happens in Spain when a non-resident individual contributes real estate located in Spain to a Liechtenstein private-interest foundation: a Stiftung, or an Anstalt set up in foundation form.

The answer distinguishes three moments: the assets leaving the founder’s estate, their entry into the foundation and the beneficiaries’ eventual access to them. At none of these points is the foundation subject to Inheritance and Gift Tax (ISD).

The facts

The applicant, not resident in Spain, plans to set up a vehicle in Liechtenstein for his succession planning and to contribute all his assets to it, including some properties located in Spain. Both structures he is considering have legal personality of their own under Liechtenstein law and are run by an independent body.

The facts described matter for the answer. The founder keeps no rights over the contributed assets and no control over the managing bodies, and the beneficiaries have no rights of disposal or control either. The founder merely defines a “circle of beneficiaries”, who may access the assets only for maintenance needs, serious illness or education, and each allocation is decided by the managing body. The founder himself may be among the beneficiaries. The arrangement is irrevocable and unlimited in time: not even the founder’s death affects the assets.

The question is what tax obligations the founder and, where relevant, the beneficiaries have in Spain.

The starting point: no treaty with Liechtenstein

The DGT recalls that, in 2016, Liechtenstein was on the tax-haven list of Royal Decree 1080/1991, applicable by reference from the second transitional provision of Act 36/2006, of 29 November, on measures to prevent tax fraud. As there is no double taxation treaty with Liechtenstein, the applicant’s income is governed directly by the consolidated text of the Non-resident Income Tax Act (TRLIRNR), approved by Royal Legislative Decree 5/2004, of 5 March.

That classification reflects the rules in force when the ruling was issued. Liechtenstein’s current position should be checked before applying the criterion to a transaction today.

The founder: capital gain subject to Non-resident Income Tax

Article 13.1.i).3º TRLIRNR treats as obtained in Spain the capital gains arising, directly or indirectly, from real estate located in Spanish territory. Contributing the properties to the foundation, even gratuitously, alters the composition of the founder’s estate and gives rise to a capital gain or loss within the meaning of article 33.1 of the Personal Income Tax Act, to which the TRLIRNR refers.

The gain is computed under articles 34 to 36 of the Personal Income Tax Act as the difference between acquisition and transfer value. For gratuitous transfers, both values are those resulting from the ISD rules, capped at market value. Put simply, the fact that the founder receives nothing does not prevent taxation: the gain built up in the property is taxed in Spain under Non-resident Income Tax at the time of the contribution.

The foundation: no Inheritance and Gift Tax

The acquisition of the properties by the Liechtenstein entity is not subject to ISD, because the acquirer is a non-resident legal person. ISD only taxes acquisitions by individuals.

The DGT adds that the entry of the properties would, where applicable, be taxed under Non-resident Income Tax by virtue of article 13.1.i).4º TRLIRNR, which treats as gains obtained in Spain those resulting from incorporating into the taxpayer’s estate assets located in Spanish territory, even if they do not derive from a prior transfer.

The beneficiaries: this is where Inheritance and Gift Tax arises

When the foundation allows beneficiaries to access the assets, there will be a gratuitous transfer in their favour subject to ISD. A beneficiary resident in Spain is taxed on a worldwide basis, that is, on everything acquired wherever the assets are located. A non-resident beneficiary is taxed only on assets located in Spain, such as the properties he or she accesses.

The DGT closes with its usual caveat: the taxation described depends on the specific facts, and verifying them is a matter for the competent tax authority in an audit procedure.

Our assessment

In our view, the ruling sets out the sequence correctly: it taxes the founder’s gain when the properties leave his estate, keeps the foundation outside ISD and reserves ISD for the moment the assets reach individuals.

However, the criterion rests on the facts described, in particular that the founder loses all power of disposal and control and that the arrangement is irrevocable. If the founder retained effective control over the foundation or over allocations, a different characterisation could be argued, so the real substance of the structure is decisive.

Two points remain open. The first is the practical scope of the foundation’s own taxation under article 13.1.i).4º TRLIRNR, which the DGT mentions “where applicable” without developing it. The second is the founder being among the beneficiaries: the ruling accepts it in the facts but does not analyse its consequences.

Practical consequences

Before contributing Spanish real estate to a Liechtenstein foundation, the entry cost should be quantified: the founder’s Non-resident Income Tax on the latent gain and the possible taxation of the foundation on the incorporation of the assets. The ruling only analyses those taxes; any other taxes that the transfer of real estate may trigger fall outside its answer.

The Inheritance and Gift Tax on future allocations to beneficiaries should also be planned from the outset, distinguishing between residents and non-residents. And it should be documented that the founder keeps no control over the foundation, since the treatment described depends on it.

Sources

  • Directorate-General for Taxes, binding ruling V0781-16, of 25 February 2016, Sub-Directorate-General for International Taxation: petete.tributos.hacienda.gob.es.