The 24-year-old most recently played for Xerez Club Deportivo of Spain's second division. He appeared in 28 matches with the club, scoring three goals.
He began his professional career at Gimnastic de Tarragona of Spain, and remained with the club for two seasons before joining Xerez.
He will be added to the roster upon receipt of his International Transfer Certificate.
"Alvaro trained with the team for several weeks last month, and played in a reserve match with us against Montreal," said Toronto FC president and general manager Kevin Payne. "He's very technical and quick, and is good at taking on defenders. He offers something different than we typically see in MLS and we think he'll help our team become more dangerous."