Understanding the Tax Treatment of Foreign Pensions in Spain

This may seem like a peculiar topic for an article, but tax systems the world over can be peculiar, and Spain is no exception. In this article, we will review the types of foreign ‘retirement pensions’ and explain how they are taxed in Spain.

Understanding the tax treatment of pensions in Spain is significant because in some cases pensions paid from other countries can be either:

• Completely exempt from tax in Spain
• Partially exempt from tax in Spain
• Subject to the lower tax rates than usually applies
• Be treated as investments with the cost of contributions deductible from income received.

Let’s first remember that being a Spanish resident means that you are subject to Spanish income tax on all your worldwide income.

State Paid Pension

No surprises here. A pension paid by the social security system of any country is exactly what it says on the label. State pensions from any country are treated as earned income by the Spanish system.

The good news is that because pensions are treated as earned income, in addition to personal (5.550€) and age allowances (65+ 1.150€, 75+ 1.400€), an extra 2.000€ general deduction plus a further low-income deduction of up to 5.565€ are available.

This means a person over 75 years old pays no income tax on pension income below 14.000€.

Pension Paid by a Former Foreign Employer

Such income is treated as usual earned income by Spain, just like State paid pensions.

Pension Paid by a Foreign Government Employer

In the case that a double tax treaty exists between Spain and the other country, pensions paid by former State employees are usually exempt from income tax in Spain. Most countries have a double tax treaty with Spain, including of course the UK. Brexit has not changed this.

This exemption applies to retired Government employed nurses, teachers, police, army personnel, civil servants, and local authority employees of all types and even, sometimes, retirees of nationalised industries. In some cases, the tax authority of a country will publish a closed list of pensions that are considered as ‘Government’ pensions, and this is very helpful to avoid arguments with the Spanish tax office.

The way the exemption works depends on the precise text of the tax treaty but, usually, the pension is not taxable but does use up Spanish personal allowances and lower tax rates. This can cause other income to be taxed at higher rates.

The country that is paying the pension has the right to charge income tax but usually allows the deduction of personal allowances.

Finally, there has been much confusion as to how United Nations pensions should be taxed in Spain and here again the subject is complicated, and each situation needs to be reviewed to obtain the correct answers. Part of the confusion originates from the guidance provided by the Spanish tax office which has not always been accurate.

Foreign Retirement Savings / Private Pension Schemes

This is where the most surprising differences exist. Some foreign private pension schemes are not treated as pensions by the Spanish tax system and instead are subject to income tax like savings or investment schemes, much like Spanish “Planes de Jubilación” that can be obtained from any Spanish high street bank. The interpretation of what defines this type of arrangement can be complex and tax advice is always recommended to see if your foreign pension could benefit from this special tax arrangement.