Does Spain Tax US Pensions for American Expats?

American expatriates considering retirement in Spain must navigate how their U.S.-based pensions are taxed. The intersection of Spanish tax law and international agreements creates a complex financial landscape. For those receiving income from American retirement accounts, understanding the Spanish tax system is necessary for managing finances effectively. Your obligations begin with determining your tax residency status, which is based on a set of objective tests. Failing to correctly assess your status can lead to unforeseen tax liabilities with the Spanish tax authority, the Agencia Tributaria.

Determining Spanish Tax Residency

Spain determines an individual’s tax residency through several tests, and meeting just one is sufficient to be classified as a resident for tax purposes. The primary criterion is the 183-day rule; if you are physically present in Spain for more than 183 days in a calendar year, you are a tax resident. These days do not need to be consecutive, and temporary absences are included unless you can prove tax residency elsewhere.

Another element is the “center of economic interests” test, which applies if the primary base of your economic or professional activities is in Spain. For example, managing a business from Spain or having your primary employment income originate there would meet this condition.

The final test is the “center of vital interests,” where you are presumed to be a resident if your non-legally separated spouse or dependent minor children reside in Spain. This presumption can be challenged if you can prove tax residency in another country. Understanding these three pillars—physical presence, economic focus, and family ties—is the first step in assessing your Spanish tax obligations.

The US-Spain Tax Treaty’s Impact on Pensions

The tax treatment of U.S. pensions for American expatriates in Spain is governed by the US-Spain Tax Treaty. This treaty establishes which country has the primary right to tax income, preventing both nations from fully taxing the same funds. The agreement’s foundational principle is that the country of residence holds the right to tax pension income.

For private pensions, the treaty stipulates that they are taxable only in the state of residence. This means if you are a tax resident of Spain, your distributions from U.S. sources like a 401(k) or IRA are subject to Spanish income tax. The United States gives up its primary right to tax these funds for Spanish residents, although IRS reporting requirements may still exist.

The treaty creates specific exceptions for government payments. U.S. Social Security benefits may be taxed by the United States. A separate rule applies to pensions for government service, which are also taxable by the country that paid them, the U.S.

Spanish Taxation of Specific US Pension Types

The tax treaty’s principles have distinct consequences for different U.S. retirement accounts once you are a Spanish tax resident. The application of Spanish tax law varies depending on the pension’s source and how funds are withdrawn.

Private Pensions

Distributions from private U.S. retirement plans, including 401(k)s and traditional IRAs, are fully taxable in Spain for tax residents. When you take a distribution, it is treated as general income and subject to Spain’s progressive income tax rates from 19% to 47%. The withdrawal method can impact the tax calculation, as periodic payments are added to other income, while lump-sum distributions may qualify for certain reductions.

Roth IRAs receive unique treatment. While their U.S. tax-free status is not recognized, Spain considers the original, post-tax contributions a return of capital and does not tax them. Only the growth portion of a Roth IRA distribution is taxable as investment income.

US Social Security

Under the US-Spain tax treaty, U.S. Social Security benefits are treated uniquely. The treaty grants the United States the right to tax these payments, so if you are a resident of Spain, your Social Security income is subject to U.S. taxation rules. This means that while you must report your worldwide income to Spain, the treaty prevents Spain from taxing your U.S. Social Security benefits. You will continue to handle the taxation of these benefits as determined by U.S. law.

Government Pensions

Pensions from government service, such as the Federal Employees Retirement System (FERS), are also given special consideration under the treaty. These pensions are generally taxable only in the country from which they originate. Therefore, a U.S. federal government pension paid to a U.S. citizen residing in Spain is taxable by the United States, not Spain. There is a notable exception to this rule: if the recipient of the U.S. government pension is a Spanish citizen, Spain would have the right to tax the pension income.

Reporting Pension Income in Spain

Once you determine your Spanish tax residency and the taxability of your U.S. pension income, you must comply with Spanish reporting requirements. Tax residents are obligated to report their worldwide income, which includes any taxable pension distributions. This declaration is made annually on Spain’s personal income tax return, known as the Modelo 100. The filing period for this form generally runs from early April to June 30th for the preceding year’s income.

For pension income that is taxable in Spain, such as distributions from a 401(k), you will include it as part of your total income. Because the U.S. taxes its citizens on worldwide income, you can claim a Foreign Tax Credit on your U.S. tax return (IRS Form 1116) for the taxes you paid to Spain on that same income. This credit mechanism reduces your U.S. tax liability by the amount of taxes you have already paid to the Spanish government. Proper documentation of taxes paid in Spain is necessary to claim this credit accurately.