Taxation of foreign trusts in Andorra: a strategic tool for wealth and estate planning

International tax

Andorra has established itself as a privileged destination for wealth and estate planning. Its tax system, with direct and indirect taxes well below the European average and no taxes on wealth, inheritance, or donations, offers an ideal environment for the accumulation and preservation of wealth.

In this context, the legal concept of trust acquires notable relevance. While Andorran Civil Law, rooted in the continental tradition, does not recognize trusts—since they originate from common law—it does allow for interaction with trusts constituted under foreign legislation. This pragmatic approach enables residents to benefit from their fiscal advantages in wealth and estate planning, provided, of course, that the trust is created, maintained, and liquidated with expert legal advice. This article analyzes how a properly structured foreign trust can serve as a legal architecture where security, efficiency, and a global perspective converge.

Concept

A trust is a legal relationship that may be established inter vivos or mortis causa, through which a person (the settlor) segregates certain assets and rights, along with their fruits and yields, from his or her estate, thereby forming an autonomous patrimony under the management of another natural or legal person (the trustee). The trustee administers them in the interest of a beneficiary or for a specific purpose, ultimately transferring definitive ownership once the event, term, or condition set out in the trust instrument is fulfilled.

Its essential feature lies in the separation between the legal ownership held by the trustee and the beneficial ownership vested in the beneficiary.

Parties to the trust

Settlor: the person who creates the trust and contributes assets and rights from his or her estate.
Trustee: the natural or legal person who receives the trust assets and administers them according to the trust deed.
Beneficiary: the person or persons who will receive the economic benefits of the trust at a certain point in time. In any case, the beneficiary is the ultimate beneficial owner of the income or assets generated by the trust. Beneficiaries may be present, future, or even conditional.
Protector: sometimes appointed by the settlor, this third party oversees and supervises the trustee. The protector ensures the settlor’s will is respected, providing an additional layer of security in complex or long-term trusts. This figure is optional.

Key features

(i) Trust assets form a separate fund and are not part of the trustee’s estate; (ii) Title to the trust assets is registered in the name of the trustee or another person on the trustee’s behalf; (iii) The trustee has both the authority and the duty—subject to accountability—to manage, administer, or dispose of the trust assets in accordance with the trust instrument and any obligations imposed by law; (iv) In some cases, the fact that the settlor retains certain prerogatives, or that the trustee may also hold beneficiary rights, is not necessarily incompatible with the existence of a trust.

Common types of trusts

Revocable vs. Irrevocable: a revocable trust allows the settlor to revoke or amend it (recovering the assets) during his or her lifetime. In an irrevocable trust, the settlor relinquishes this power from the outset, so the assets permanently leave the settlor’s estate. Revocability has important tax consequences: Andorra only considers ownership transferred to the beneficiary if the trust is genuinely irrevocable.
Discretionary vs. Non-discretionary: in a discretionary trust, the trustee has discretion to decide how much, when, and to which beneficiary distributions are made. Beneficiaries do not acquire vested rights until the trustee exercises such discretion. In a non-discretionary (fixed) trust, beneficiaries have defined rights to income or capital, as set out in the trust instrument.
Income vs. Accumulation: an income trust entitles the beneficiary to immediate enjoyment of trust income, while in an accumulation trust, the trustee retains the income and adds it to the capital of the trust.

What are trusts used for?

Trusts are a versatile tool for international wealth planning: they enable the orderly organization of assets, the professional management of investments, and the channeling of philanthropy with continuity and control. Their design must always be assessed case by case.

International succession and asset protection: a trust can operate as a functional substitute for a will: the trustee executes predefined instructions, reducing friction against potential forced heirship claims. By segregating assets, and if properly structured, trust property remains outside the reach of the settlor’s contingencies (e.g., debts, litigation), adding a layer of legal security.
Investment vehicle and family governance: a trust centralizes asset management under professional and long-term criteria, ensuring intergenerational continuity. Clear rules on risk, objectives, and distributions are established, reducing conflicts.
Structured philanthropy: charitable trusts allow for donations under trustee supervision, ensuring continuity beyond the settlor’s lifetime, with flexibility.

Beyond personal or family use, trusts may also be applied in corporate structures (e.g., debt issuances or compensation schemes).

Tax residency and scope of taxation

Only individuals who are tax residents in Andorra are subject to personal income tax (IRPF) on their worldwide income. An individual is deemed resident if: (i) he or she spends more than 183 days in the calendar year in Andorra; (ii) his or her main professional or economic interests are located in Andorra; (iii) residency is also presumed where the taxpayer’s spouse (unless legally separated) and dependent minor children reside in Andorra.

Guiding principle: the trust “does not exist” for IRPF purposes

Andorra has developed specific criteria for dealing with income derived from trusts and similar structures. The key reference is the Technical Note of 25/11/2015 issued by the Departament de Tributs i Fronteres, which clarifies the taxation of income obtained through foreign trusts and foundations under the IRPF. This interpretative note applies from fiscal year 2015 onwards.

Since Andorran law does not recognize trusts as legal entities, for tax purposes this has major implications, particularly regarding IRPF. Under Andorran tax law, a trust is treated as “non-existent,” meaning it is not regarded as an independent taxpayer. Consequently, income generated by trust assets is attributed directly to the individuals involved (settlor or beneficiary), depending on who is considered the true beneficial owner of those assets.

Presumption and exception of ownership

General rule: it is presumed that the settlor retains ownership of the trust assets and is therefore liable for the income they generate.
Exception: where it is indisputable that the beneficiary holds the economic rights and is clearly identified, beneficial ownership is attributed to that beneficiary. In practice, the irrevocability of the trust and the absence of control powers of the settlor are decisive indicators for recognizing this transfer.

In no case may the trustee be regarded as the beneficial owner, as the trustee acts solely as administrator of the trust.

Three tax-relevant stages in the life of a trust

For tax purposes, three distinct stages must be considered:

(i) Constitution of the trust

If the creation of the trust and the contribution of assets imply a transfer of ownership from settlor to beneficiary, the transaction may trigger IRPF consequences:

If the settlor is an IRPF taxpayer: the transfer may give rise to a capital gain or loss, although exemptions apply:

Inter vivos: no gain or loss is recognized where the gratuitous transfer is made in favor of relatives up to the third degree (including spouse or registered partner).
Mortis causa: any potential capital gain is exempt in transfers due to the death of the taxpayer.

If the beneficiary is an IRPF taxpayer: gratuitous acquisitions (inter vivos or mortis causa)—including inheritances, legacies, donations, gratuitous transfers, and life insurance where the policyholder differs from the beneficiary—are not subject to IRPF.

(ii) During the life of the trust

Income, gains, or losses generated by the trust assets are taxed under IRPF according to their nature and are attributed to the person (settlor or beneficiary) deemed the beneficial owner, provided that person is an Andorran tax resident.

(iii) Distribution of trust income or capital

Beneficiaries may receive income (fruits) and/or capital (corpus) from the trust. Such distributions, made in accordance with the trust deed, are classified as gratuitous acquisitions (inter vivos or mortis causa) and are not subject to IRPF for the beneficiary, consistent with point (i).

If ownership of the assets had already been transferred to the beneficiary upon constitution of the trust, subsequent capital distributions by the trustee do not generate taxable income, as they merely represent delivery of capital already owned by the beneficiary. This does not affect the taxation of income produced by those assets going forward.

Conclusion

Foreign trusts are a powerful and legitimate tool for estate and wealth planning for Andorran residents. Their success depends on impeccable technical design, real substance, transparency, and consistent reporting, all within the framework of Andorra’s favorable tax regime. Properly structured, they enable efficient estate planning, strengthen family governance, and ensure intergenerational continuity in succession planning. Poorly structured, however, they expose parties to recharacterization risks and potential penalties.

How can we help you?

If you are an Andorran resident—or considering relocating to Andorra—and are involved in a trust (as settlor or beneficiary), or if you are considering estate or succession planning through a trust, our team can assist you.

We provide specialized legal advice to safeguard your wealth and plan your succession, ensuring compliance with international standards and all legal obligations in Andorra.

Contact us today to discuss your case.