The first and most important idea to keep in mind is that an individual with American nationality which is tax resident in Spain (because he lives permanently in Spain) is subject to tax in Spain on his worldwide income and therefore taxed under the rules governing the Personal Income Tax. However, if this individual perceives pensions from a US source, the Convention between the Kingdom of Spain and the United States to avoid double taxation and prevent fiscal evasion with respect to taxes on income would also be applicable.
Regarding pensions that are not from a public office, the Convention states:
“1. Notwithstanding the provisions of Article 21 (Government Service):
- a) pensions and other similar remuneration derived by a resident of a Contracting State is the beneficial owner, in consideration of past employment shall be taxable only in that State, and
- b) The Social Security benefits paid by a Contracting State to a resident of the other Contracting State or a citizen of the United States may be taxed in the first-mentioned State.
- Annuities derived by a resident of a Contracting State is the beneficial owner may be taxed in that State. The term “annuities” within the meaning of this section means an amount predetermined paid periodically at specified for a period of time, under an obligation in return for adequate and full compensation (other than the provision of services). “
Accordingly, pensions paid by a private entity in the United States whether in consideration of past employment or not, are subject to tax in Spain. Nevertheless, in accordance with Article 1.3 of the Convention, the United States may tax such pensions on grounds of citizenship. In this respect, article 1.3 of the Convention states:
“Notwithstanding the provisions of the Convention, other than those contained in paragraph 4, a Contracting State may tax its residents (as defined in Article 4), by reason of citizenship may tax to its citizens, as if the Convention had not come into force. “
The effect of this clause is that American pensioners living in Spain could experience a double taxation issue. Spain could tax the pensions based on the residence criterion, while the US could tax them based on the criterion of citizenship. To deal with this situation, the Convention states that:
“In the case of a natural person resident in Spain American citizenship, the income which may be taxed in the United States as to citizenship under the provisions of paragraph 3 of Article 1 (general area) shall be considered obtained in Spain in the extent necessary to avoid double taxation, provided that the amount of tax paid in the United States is not less in any case to which they would have paid if it will not be a natural person with citizenship of the United States. “
Therefore, with respect to pensions paid by a private entity in the United States and whether or not arising past employment shall be for the USA to eliminate the double taxation .
On the other hand, with regard to pensions paid by the Social Security of the United States, as provided in Article 20.1 b) of the Tax Treaty, they may be subject to tax in the United States. In Spain, this pension is also subject to tax, taxed as employment income, for the full amount under the Personal Income Tax Act.
In this respect, the art. 24.1.a) of the Convention provides for the avoidance of double taxation, that “when a resident of Spain derives income which, in accordance with the provisions of the Convention, may be taxed in the United States based on criteria other than citizenship, Spain allow deduction of tax on income of that resident an amount equal to the tax paid in the United States”
Therefore, with respect to pensions paid by the Social Security of the United States, Spain has the obligation to eliminate the double taxation which could arise. In other words, the tax payer must include the benefits of Social Security paid by the United States in the annual income tax return but can deduct from the tax payable in Spain, the tax paid in the United States in respect of such Social Security pension.