# Another US - Spain tax treaty post



## Tucsonsteve (Mar 26, 2013)

My wife and I are hoping to retire to Spain in late 2021 from the US. We happen to be Italian (and US) citizens, so won't have to get visas. I am trying to get reliable information regarding taxation of government pension income, but haven't yet succeeded. I have searched this forum and found "answers," but they run afoul of the relevant tax treaty, in my view.

I would appreciate comments from anyone who is knowledgeable about the following OR who can provide contact information for a Spanish tax professional (who can communicate in English) who is knowledgeable about US expat taxation in Spain.

*Pensions and 457(b) withdrawals from US government (including state and local) employment:* This will represent the bulk of our retirement income until US social security kicks in many years down the line.

Article 21 of the US - Spain tax treaty says these are taxed only by the US. Not so fast, though. Article 1, paragraph 3, the "Saving Clause," means that as residents of Spain, Spain would be able to tax us as though there's no treaty. Ditto for the US because we are US citizens, but that's overkill since Article 21 already says that the US taxes the pensions. As I understand it, Spain taxes its residents on foreign income, including pension income. Article 1, paragraph 4, exempts from the Savings Clause Article 21 stuff paid by the US, but only for people who aren't US citizens or have immigrant status in the US. So, the Saving Clause applies (I think) to add tax liability to Spain on the US government pensions (and 457(b) withdrawals). I would guess we could avoid double taxation through credits against Spanish taxes for US taxes paid (or vice versa), but we would end up paying substantially higher Spanish taxes.

Does anyone have a contrary understanding of the treaty's application here?

*Effective tax rate estimate in Spain:* I am trying to estimate the effective tax rate on, say, a US retirement income of $85,000 for a couple residing in Spain. I see tax bracket tables galore, but no helpful discussions of personal exemptions or what have you. Assuming our pensions are subject to Spanish taxation, can someone point me to a decent discussion that might help me get a rough estimate of the taxes we'd have to pay?

Alas, so much of what's out there is specific to those from the UK, which isn't helpful at all to those working under a different treaty.

Again, I am happy to receive contact information for a competent tax professional. I am not trying to avoid paying for competent advice. I recently reached out to a tax professional and I am waiting to hear back. I believe, though, that it's best to try to be as knowledgeable as possible, if only to be able to assess whether the tax professional is competent or clueless.

Thank you for your time.


----------



## LisaDav (Feb 3, 2019)

As far as I know US citizen don`t pay double taxes due to treaty with Spain. I told my husband that we will not pay such taxes but he insist that we still will pay to federal government. I think we should consult layers there to get clear picture but just in case I am posting his letter to me 

" As for taxes, should we buy in Spain we will be subject to putting up front $22,700 just for taxes at settlement. This means that much more up front retirement money will need to be withdrawn to cover the tax. About $30,000 would need to be withdrawn of which 24% ($7,200) would go to the US Government and Virginia, leaving about $22,700 to be given to the Spanish Government. In effect giving the US Government, Virginia and Spain $30,000 for nothing. Then every year the taxes that need to be paid to the province in Spain that is comprised of two parts: Income Tax and Property Tax. For a property in Madrid with a market value of $200,000 will require a total tax payment of about $1,968 per year. There are no deductions. US Government federal taxes will also still be required to be paid. The payment of $30,000 for taxes will impact the amount of money we will have to spend in retirement over the long term. Additional retirement money will also need to be withdrawn to cover the high cost of closing and bank fees – the cost sheet I sent to you last week. The total amount less what we can save from now to January 2020 is between $34,306 and $54,306. This does not account for moving fees ($5,000), attorney fees ($1,245) and residency visa requirements which is about $4,200 for us in obtaining our Spanish NIB numbers (similar to social security numbers) to enable us to buy property in Spain."
Hope it can help,
Lisa


----------



## LisaDav (Feb 3, 2019)

Lisa Davlet I found this detailed explanation. You can read only black boxes otherwise it is too boring )) https://www.accountinginspain.com/pay-taxes-americans.../
Управление

https://www.accountinginspain.com/p...DnNu1i0zcNENjxfidJEpE8ebilfNfpiwWmDh5ZDmttpuA


----------



## Tucsonsteve (Mar 26, 2013)

Thank you. I had come across that before and found it to be a careful discussion of the treatment of private pensions and social security under the tax treaty. Most discussions stop at the article specific to the income at issue, then ignore the saving clause. The discussion makes clear that the saving clause of the treaty overrides pretty much every provision so that in most cases, a U.S. citizen residing in Spain will be subject to Spanish taxation, but depending on the income source, will either receive a credit on the U.S. taxes paid, thereby reducing the amount owed to Spain (and avoiding double taxation) or a credit on the Spanish taxes paid, thereby reducing the amount owed to the U.S. (and again avoiding double taxation.

The bottom line, however, is that if income is subject to Spanish taxation, the total amount of taxes paid will be no less than what the Spanish tax obligation would be (absent credit for amounts paid to the U.S.). For me, that looks like my taxes will increase to at least 2 1/2 times what they are if I remained a U.S. resident, which would hurt.

I'm thinking that Portugal might be a better option if the non-habitual resident program is still around in a few years.


----------



## Tortuga Torta (Jan 23, 2016)

Tucsonsteve said:


> My wife and I are hoping to retire to Spain in late 2021 from the US. We happen to be Italian (and US) citizens, so won't have to get visas. I am trying to get reliable information regarding taxation of government pension income, but haven't yet succeeded.


Color me unsurprised.



> I would appreciate comments from anyone who is knowledgeable about the following OR who can provide contact information for a Spanish tax professional (who can communicate in English) who is knowledgeable about US expat taxation in Spain.


I actually don't know if the latter exists. From what I understand, one can ask five different Spanish tax professionals and get five different answers. I have lost all trust in this system to give a clear answer (but I have not lived this life, just researched it from the U.S., as I was considering moving to Spain at some point).

I may put more reading into this later and get back to you but in essence I just gave up on this whole issue, settled on the idea that all our retirement accounts would get taxed at their rates, and am no longer actively thinking about moving to Spain. I also looked into Portugal for the reason you mentioned, but figured out that it wasn't applicable to us (I can't recall why) and gave up on that as well. Also, since you mentioned you'd have $85k/yr in income from these accounts, keep in mind Spain also has a wealth tax, though there's a $700k per person in a couple, if I recall, though it may vary by community.

Keep in mind, though, if cost of living in Spain is x% cheaper than where you would be living anyway in the U.S., that might offset the increased taxes in some cases.


----------



## 95995 (May 16, 2010)

Have you considered France? I think you would do far better tax-wise and that it could more than compensate for the higher cost of living.


----------



## Phil Squares (Jan 13, 2017)

Have you considered setting up a living trust? Advantages are taxes in the US are paid at a lower rate and money distributed from the trust is tax free. Legally, the trust is an individual taxpayer and will not live in Spain, so the Spanish government has no claim to any of the trust's assets. Other advantages are in the event of the death of one of the trust's beneficiaries, the trust bypasses inheritance tax and the assets are transferred, in trust, to the other people involved

Disadvantages are the fees can be steep but depending on which bank you use they can usually be fairly reasonable. 

My retirement and social security are paid into our trust, the trust itself earns interest/dividends which is added to the trust and we are paid a monthly amount from the trust. Should we buy a house in Spain, the trust would actually purchase it as an asset and we would make monthly payments back into the trust.

If you are still in the US, it would be a good idea to speak with a bank which has a trust department or a financial planner and they could sort things out for you. 

My wife works as a Computer Science teacher and we only pay income on her earnings in Spain.


----------



## skip o (Aug 1, 2011)

"For me, that looks like my taxes will increase to at least 2 1/2 times what they are if I remained a U.S. resident, which would hurt."

Everyone's situation is different but when I compare all the taxes I would be paying in the US (federal & state income, property taxes) and the taxes I pay in Spain (income, property and the wealth tax) and the total taxes to be paid are about the same. Income taxes are a little higher in Spain, but property taxes are massively lower in Spain. I file taxes in the US and Spain every year, so it is easy for me to compare apple to apples. However, I am comparing a big city in the US vs a big city in Spain. 

Factoring in how ridiculously expensive health insurance, health care & prescriptions are in the US, and I am saving money by living in Spain. Public transport is cheaper and better in Spain, so I don't need to own a car. Food is a little cheaper in Spain too.


----------



## Bevdeforges (Nov 16, 2007)

I don't know about Spain specifically, but you may want to raise this question over in the Expat Tax section on the forum: https://www.expatforum.com/expats/expat-tax/

The issue of the "savings clause" comes up pretty frequently and, at least in the case of pensions (i.e. US SS and government created "deferred taxation" plans) it seems to be the case that these are specifically excluded from the savings clause. (That is certainly the case here in France and I've heard it cited for a number of the other European tax treaties with the US.)

Where the "savings clause" seems to really bite folks is usually having something to do with investments and bank interest. But the folks over on the Expat Tax section can probably explain this all better than I can.


----------



## Tucsonsteve (Mar 26, 2013)

Tortuga Torta said:


> > I actually don't know if the latter exists. From what I understand, one can ask five different Spanish tax professionals and get five different answers. I have lost all trust in this system to give a clear answer (but I have not lived this life, just researched it from the U.S., as I was considering moving to Spain at some point).
> 
> 
> Yes, I did come across your previous posts. It sounds like you and I are on the same page with respect to the treaty. The problem of unreliable tax experts poses is that a more favorable understanding might result in Spain coming after me for years of back taxes and heavy penalties with nothing but a "lo siento" from the expert who got it wrong. Absent some declaration from the Spanish tax authority on the matter, I am really hesitant to accept advice that I do not have to pay Spanish taxes.
> ...


----------



## Tucsonsteve (Mar 26, 2013)

EverHopeful said:


> Have you considered France? I think you would do far better tax-wise and that it could more than compensate for the higher cost of living.


I hadn't considered France because I assumed, maybe incorrectly, that the taxes would be about as high as Spain. A quick glance makes me thing that might be a bad assumption, but I do seem to recall someone mentioning a death by a thousand cuts in France because there's a large number of small taxes to take into account. I'll keep France in mind. Thank you.


----------



## Tucsonsteve (Mar 26, 2013)

Phil Squares said:


> > Have you considered setting up a living trust? Advantages are taxes in the US are paid at a lower rate and money distributed from the trust is tax free. Legally, the trust is an individual taxpayer and will not live in Spain, so the Spanish government has no claim to any of the trust's assets. Other advantages are in the event of the death of one of the trust's beneficiaries, the trust bypasses inheritance tax and the assets are transferred, in trust, to the other people involved
> 
> 
> I have to say I am very skeptical of this. I don't pretend to know Spanish tax law and how trusts are treated, but I am somewhat familiar with trusts and have one (a plain vanilla self-settled, revocable trust) as part of my estate plan. For the most part (exceptions include things like charitable trusts that pay to a charity on death and various specialty trusts that might reduce the estate assets subject to taxation for things like a house), they essentially do nothing when it comes to tax avoidance, but are a convenient way to avoid probate and control property for a long time after death (or incompetence), though the latter is typically a concern of the very wealthy or those with spendthrift heirs who can't be trusted with the money.
> ...


----------



## Tucsonsteve (Mar 26, 2013)

Bevdeforges said:


> I don't know about Spain specifically, but you may want to raise this question over in the Expat Tax section on the forum: https://www.expatforum.com/expats/expat-tax/
> 
> 
> 
> ...




Thank you, Bev. I’ll check out the forum. I wasn’t aware of it. As for the saving clause, it exempts government pensions and other remuneration for government service for those who aren’t citizens of or have immigration status in the state conferring the benefit. I’ve read it over and over and what I gather is that the saving clause’s exception doesn’t apply because I’m a U.S. citizen receiving the pension from the U.S. That is, the saving clause does apply to me. I will be very happy if someone in the other forum shows me I’m wrong.

The treaty is confusing, I think, because you have to know the goals of the treaty provisions first in order to readily understand them. I mean, why would someone contemplate that the article governing government pensions and seemingly deciding which government taxes them isn’t the end of the matter and the saving clause just nullifies that article for the most part? The goal isn’t to decide which state taxes something, but to decide which state has dibs on taxing something and which has to give you a credit against those taxes paid to the other state, at least for my pension.


Sent from my iPhone using Tapatalk


----------



## MickinUS (Jun 26, 2013)

Phil Squares said:


> Have you considered setting up a living trust? Advantages are taxes in the US are paid at a lower rate and money distributed from the trust is tax free. Legally, the trust is an individual taxpayer and will not live in Spain, so the Spanish government has no claim to any of the trust's assets. Other advantages are in the event of the death of one of the trust's beneficiaries, the trust bypasses inheritance tax and the assets are transferred, in trust, to the other people involved
> 
> Disadvantages are the fees can be steep but depending on which bank you use they can usually be fairly reasonable.
> 
> ...


Phil,
Not an expert on trusts by any means but obviously in your situation you have set it up with whatever property, stocks and bonds and cash you had originally. The retirement and social security income you pay in to the trust BUT you report those on your return and so are US tax-paid (or tax free). Passing that income through a US trust and taking a distribution out the other end is just masking the source of your monthly funds. Your retirement income should be declared and liable for Spanish taxes (as per Treaty). Your retirement accounts and social security are your alone and cannot be held in a trust.
You really would want to be careful about the use of trusts in Spain - the Spanish Agency have an interesting view if the beneficiary is a Spanish tax resident.
https://www.internationaltaxreview....-review-of-the-Spanish.html?ArticleId=3790286


----------



## Phil Squares (Jan 13, 2017)

Just to point out, the article is written by a tax advisor. In our case, all of the beneficiaries are not Spanish Tax Residents. It is an irrevocable trust and I have no direct input as to the investments. While I have a methodology to express my level of comfort, it is up to the trustee. Any money that I want or request is tax-free income as my social security and pensions are tax-free in the US.

The situation was posed to the Spanish authorities and their position in writing is the tax-free funds which have been deposited are considered tax free here in Spain. There are some tax-free bonds which fall into the same category, the dividends are tax-free and can't/will not be touched by the Spanish government. 

The bank which holds the trust had a duty to ensure they are not in violation of any tax laws, US or otherwise. My actual pensions are just like social security in there is no tax liability. If funds are needed, the SS funds are taken first then my pension. So far, very little has been taken out of the trust so it really becomes a mute point.


----------



## MickinUS (Jun 26, 2013)

Oh, okay, I assumed if you were drawing funds every month you were a beneficiary. I didn't think you could withdraw (or request from the trustee) funds on a regular basis form an irrevocable trust. Goes to show what I know. 

Good to know our US social security benefits won't be taxed in Spain if deposited in US bank - I've seen so many different answers online.

US Banks will only concern themselves with US laws.


----------



## Phil Squares (Jan 13, 2017)

You can set up an irrevocable trust to do pretty much anything (legal) you want. You can set up payments on demand, regular payments, dividend payments only. It really depends on what your goals are. 

With respect to US Banks, most good US Bank Trust departments will concern themselves with what you want, especially if you are moving abroad. Luckily, I have someone I grew up with who is a trust attorney and does a great job and he is cheaper than what the bank would charge. 

Plus I am very lucky, my wife is 10 years younger than I am and teaches Computer Science/ICT and we just live off her salary. Unless we go on a big trip we can live very comfortably on her salary. And the best part is the school pays for private medical insurance.


----------



## MickinUS (Jun 26, 2013)

My wife and I are close to retirement age - I hit 65 next week and she is a year younger but we anticipate working for quite a few more years but we work for ourselves and it's all online and phones and is totally portable. It would be pointless for us to claim SS benefits because we'd get taxed too heavily on them. 

The issue for us in the short term is to figure out the best destination between Spain and Portugal, tax-wise. Taxes in Spain at 45% over $60k seem very high and on the other hand Portugal has this tax-free NHR option that I may qualify for. 

Healthcare is the other issue. As an Irish pensioner next year, I am entitled to a contributory pension. Its miniscule BUT it should entitle us both to an S1 and so free public healthcare in EU. I notice online that in Portugal you can supplement that cover through your local banks for a nominal amount but I don't see that in Spain. We are looking (from a distance) at Cascais/Sintra area outside Lisbon and outside Marbella. We would rent out our property in the US and rent in either place.


----------

