In this article, we present a thorough overview of the taxation of foreign pensions in Spain. We address the question of whether paying taxes is necessary, the applicable tax rates if any, as well as the process of declaring foreign pensions and potential money-saving bonuses.
Which taxes are applicable to foreign pensions?
It is important to understand how the Spanish Tax Agency (Agencia Estatal de Administración Tributaria or AEAT) categorizes pensions. Pensions are considered as income and are therefore subject to the Personal Income Tax (IRPF).
The specific tax rate depends on the amount of income generated and various deductions and allowances that may apply. In the following sections, we will explore these concepts in detail to help you determine the precise tax percentage applicable to your pension.
It’s crucial to note that pensions are considered as income, although there is an important distinction for private pensions. For example, traditional American 401k and IRAs are also taxed as pensions. However, Roth IRAs and Roth 401ks are not classified as pensions. They are subject to estate tax and are taxed upon withdrawal.
Do I need to pay taxes on my pension if I reside in Spain?
There are three primary considerations that need to be addressed:
Tax residency status:
If you spend more than 183 days (6 months) per year in Spain, you will be considered a tax resident. Non-lucrative visa holders who receive a pension typically fall into this category, although on June 2023 there has been a Supreme Court ruling that eliminates the requirement of a 6 month minimum stay in Spain for Spanish non lucrative visa holders. As a tax resident, you are required to pay income tax (IRPF) in Spain on your worldwide income, including pensions.
Source and total income per year:
As a tax resident, you must consider the total amount of income you generate annually and whether it comes from a single source or multiple sources. If your income consists solely of a pension and the annual amount is less than €22,000, you are not obligated to file an income statement, and your pension will be tax-free. However, if your pension income exceeds €22,000 per year, you will be required to pay taxes on that income.
However, if you have additional sources of income along with your pension, the threshold for filing an income statement is lower. If your total income (including pension and other sources like rental income) exceeds €12,000 per year and the income from the smallest source is more than €1,500 per year, you must submit an income declaration and pay taxes on your pension.
Pensions received from outside Spain:
As a tax resident, you are obligated to declare and pay taxes in Spain on all income generated worldwide, including pensions received from both Spain and other countries. However, there is an exemption. If you paid income tax on your pension in the country of origin and Spain has a double taxation agreement with that country, you may not have to pay the same tax again in Spain. In some cases, you may only need to pay the difference in taxes if the tax rate in Spain is higher than that of your country of origin. However, there are instances where you would pay the full tax amount in Spain and then request a refund from your country of origin. Most countries have a double tax treaty with Spain, including the US or the UK, but it is important to verify the complete list of countries with such treaties to ensure accuracy.
How are foreign pensions taxed in Spain?
Determining the exact tax percentage can be complex as it depends on various factors. Generally, income tax follows a progressive rate ranging from 19% to 47% based on your earnings.
| Income Range (Euros) in 2023 | Tax Rate |
|---|---|
| Up to 12,450€ | 19% |
| 12,450 to 20,199 | 24% |
| 20,200 to 35,199 | 30% |
| 35,200 to 59,999 | 37% |
| 60,000 to 299,999 | 45% |
| More than 300,000 | 47% |
Please note that these tax rates are subject to change.
Additionally, there are different bonuses and deductions available that can lower the base tax rate and help you reduce your tax liability. The rate at which taxes are withheld at the source depends on your specific pension, but on average, it is around 7.7%. Higher public pensions may have an original withholding rate of 19%.
Deductions and allowances
There are several deductions available to help you save on taxes:
- If you are between 65 and 74 years old, you can benefit from a €6,700 bonus.
- If you are over 75 years old, the bonus increases to €8,100.
- Everyone is eligible for a personal bonus of €5,500.
These deductions work by exempting the specified amounts from taxation, applying the applicable tax rate to the remaining income.
Are pensions taxed under wealth or capital gains tax?
No, pensions are not subject to wealth or capital gains tax. As mentioned earlier, pensions are considered income and are taxed under the Personal Income Tax (IRPF). The exception to this rule applies to private pensions such as Roth IRAs and Roth 401ks, which are taxed through estate tax.
How to pay taxes on your pension
Taxes on your pension must be paid annually through the income statement (Declaración de la Renta). The filing period for the income statement is from April to June 30th of the following year. During this process, you will declare your pension income and pay the corresponding tax percentage. For specific guidance tailored to your circumstances, it is advisable to consult tax experts who can provide step-by-step assistance.
