SO, YOU WANT TO RETIRE IN SPAIN.
We get it. Nice weather, great services, affordable prices. But, you are worried about the taxes you must pay on pensions in Spain with plans from abroad.
Are they taxed in Spain? And, how is it possible that they are taxed again in Spain if they are also taxed in your home country? Also, do you have to file a Tax Return on them?
Don’t worry, because, at Lexidy Law Boutique, we can answer all of your questions, and more.
(Note: Updates to original article made by Lexidy Staff April , 2023)
SPANISH TAX RESIDENTS AND PENSIONS IN SPAIN FROM ABROAD
If you receive pensions corresponding to former employment in another country, you will only have to consider it for Spanish tax purposes if you are a Spanish Tax Resident. For the years that you are a Spanish Non-Tax Resident, lay back and relax. There are no taxes to be paid on these pensions in Spain.
Also note that, if more than 184 days in one calendar year are spent in Spain, you are a Spanish Tax Resident. This could also happen if your spouse and minor dependent children are Spanish Tax Residents.
PUBLIC VS PRIVATE PENSIONS
If you receive public pensions corresponding to a job as a civil servant (teacher, police officer, doctor, military, among others), these pensions are exempt from taxation and can only be taxed in the corresponding country where they are received. However, the amount of pension income will be used to calculate the progressive rate that might be applicable, in case you have to file a Personal Income Tax Return. If you are of Spanish nationality, these pensions will only be subject to taxation in Spain.
If you receive private pensions corresponding to a private job, you will have to pay taxes on them. However, in order to avoid paying taxes twice, you can deduct the amount of taxes paid abroad from your Personal Income Tax. That said, there is a limit. The deductible can only reach the amount that would be paid if the taxes had been Spanish. This depends on the foreign equivalent.
This is the standard ruling for Double Tax Treaties between Spain and most other countries. However, Double Tax Treaties with certain nations might be slightly different. In order to be sure, get a free consultation from our experts in the field and clarify the details of your financial responsibilities for pensions in Spain.
PERSONAL INCOME TAX RETURN FILING OBLIGATIONS
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If you receive private pensions of over 22,000 euros from only one payer, you will have the obligation to file a Personal Income Tax Return for that year. Remember that public pensions are exempt from calculation for these purposes.
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For those receiving pensions from multiple payers, the rules are slightly different. When the amount received after the first payer is under 1,500 euros, you only have to file a Personal Income Tax Return if the total amount from all payers exceeds 22,000 euros.
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When the amount received after the first payer is more than 1,500 euros, you must file a Personal Income Tax Return if the total amount was over 12,643 euros for that year.
The following amounts are calculated for individuals who only receive pensions in Spain. In the case that you do receive another kind of income, you may or may not have to pay. We strongly recommend getting a free consultation from our tax advisors. Let us provide assistance in the preparation and filing of your Personal Income Tax Return.
PRACTICAL EXAMPLE
Mike is a U.S. national who is considering retiring, using his pensions in Spain. He receives 30,000 euros in the year for a pension corresponding to his former job as a civil servant for the state of Missouri. He has paid 5,000 euros to the IRS in taxes. Additionally, he receives 25,000 euros that year from a private pension. He has been adding to it for the duration of his life and has paid 4,300 euros in total.
Does Mike have to file in a Personal Income Tax in Spain?
To answer this question, we will exclude considering public pensions, as they are exempt from taxes.
He has been receiving “employment income”, which, in this case, comes from his pension plans. This is when there is more than one payer, and the total amounts received from the second to the last payer is 25,000 euros. The total amount is over 1,500 euros, so the applicable category threshold for filing a Personal Income Tax for Mike is 12,643 euros. As he received more than this amount, he therefore he has to file a Personal Income Tax Return on his pensions in Spain.
What is the applicable tax rate?
To speak about the applicable tax rate, we will elaborate on both public and private pensions. Spain taxes employment income a progressive rate ranging from 19% to 45%. In this situation, an annual income of 55,000 euros corresponds to a tax rate of 26%.
This 26% will only apply to the taxable income, which is 25,000 euros for private pensions.
How much tax will Mike have to pay?
The tax liability (once he deducts his personal allowances) is 4,667 euros.
However, the taxpayer will be able to deduct the amount of taxes paid abroad on these pensions in Spain, which is 4,300 euros.
The final tax amount he must pay in the taxpayer Personal Income Tax Return will be a mere 367 Euros.
NOW YOU’RE THE EXPERT ON PENSIONS IN SPAIN
Take advantage of the resources at your disposal to assist you and make the process much easier. Taxes can be complex, that’s for sure. But, with the right help, they become much more simple.
