# US/ES pension taxation



## gm197 (Apr 22, 2012)

I'm having trouble understanding how the double taxation treatment between the US and Spain might affect me. I am considering retiring in Spain, drawing a US government pension. I have dual citizenship.

Am I correct in interpreting this to mean that I would be paying tax only in Spain?

The treaty states:
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ARTICLE 21 Government Service

2.
(a) Any pension paid by, or out of funds created by, a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.
(b) However, such pension shall be taxable only in the other Contracting State if the individual is a resident of, and a national of, that State.
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## xabiaxica (Jun 23, 2009)

I've moved your question to our Expat Tax forum where there are lots of people who understand the US tax system.

Spain will tax you on all worldwide income, but any specific tax already paid in a country with a tax agreement is taken into account & deducted from tax payable, for that same specific tax.


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## Bevdeforges (Nov 16, 2007)

There are a couple different variations on a theme when it comes to the US tax treaties with various countries in Europe.

Thanks for providing the relevant portion of the tax treaty. From what you've posted, it appears that the idea is that normally the taxes are paid in the source country (i.e. the US) except if you are a resident and citizen of the other country (i.e. Spain). Unless you have taken Spanish nationality, it looks as if the US is where you pay your taxes on that pension. There should be some provision in the Spanish tax system for you to declare the income and then declare that you have paid US tax on it, and how much. Normally you're either granted a credit or some sort of exemption of that income from Spanish taxation.
Cheers,
Bev


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## iota2014 (Jul 30, 2015)

gm197 said:


> I'm having trouble understanding how the double taxation treatment between the US and Spain might affect me. I am considering retiring in Spain, drawing a US government pension. I have dual citizenship.
> 
> Am I correct in interpreting this to mean that I would be paying tax only in Spain?
> 
> ...



Government pensions are tricky for dual US citizens residing in their other country of nationality, because of the Saving Clause, which removes (most) treaty benefits from US citizens.

The Technical Explanation (https://es.usembassy.gov/wp-content/uploads/sites/260/2017/04/taxation_TIAS_1591.pdf) may help, if you can understand it.



> Paragraph 2(a) grants an exclusive taxing right for any pension paid in consideration for past governmental services to the Contracting State (or political subdivision or local authority thereof) to which such services are rendered [in this case, the US]. Paragraph 2(b) provides an exception to paragraph 2(a) and grants an exclusive taxing right for such pensions to the Contracting State of which the recipient is a resident and national thereof [in this case, Spain]. *Note that paragraph 2(b) is only applicable when the recipient is both a resident and a national of the Contracting State.* Thus, the United States is granted the exclusive taxing right to the Spanish national who retires to the United States and receives a pension resulting from services rendered to the U.S. Government.
> [..]
> Article 21 is subject to the provisions of the saving clause of paragraph 3 of Article 1 (General Scope) as modified by paragraph 4 of Article 1. With respect to the United States, the modified saving clause applies to U.S. citizens and persons having immigrant status in the United States (“green card” holders). Thus, the provisions of the Article which would grant exclusive taxing rights to Spain with respect to remuneration and subsequent pensions earned by (1) persons employed by Spain and (2) Spanish resident nationals employed by the United States Government in Spain are overridden by the saving clause if the employees are U.S. citizens or green card holders.


Confusing, eh? If it was me I would just ask the Spanish taxing authority whether the pension will be taxable in Spain (making clear you're dual). 

If it's not going to be taxable in Spain, problem solved.

If it's taxable in Spain, then you could see if the US payer is able to stop the US withholding. That should be possible, if the US really does concede the exclusive taxing rights to Spain due to you being both a resident and a national of Spain. 

But if the US insists on withholding US tax because of your US citizenship, then presumably you'll need to claim credit for the Spanish tax paid, as others have said.


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## Dunedin (Aug 12, 2013)

I think that Iota is correct. The structure is as follows-
•	Article 1(3), which would be termed a savings clause, preserves the right of the US to tax its citizens as if the treaty did not apply.
•	gm197 is a US citizen and therefore most of the treaty is irrelevant.
•	Article 1(4) preserves some limited parts of the treaty. 1(4)(b) appears to preserve Article 21, government service, but does not do so for individuals who are citizens of that state.
•	Therefore gm197 gets no relief under Article 21.
•	The US would tax the pension, as it is US source income, not just because of citizenship.
•	1(4)(a) preserves Article 24, relating to relief from double taxation. Article 24(1)(a) requires Spain to give relief for US tax.


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## gm197 (Apr 22, 2012)

To make it more complicated, I believe that the first 98K of my income (I would have much less) is tax exempt in the US since I would live overseas.


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## Dunedin (Aug 12, 2013)

The tax exemption relates to non US earnings of a US citizen, so does not apply in current circumstances.


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## gm197 (Apr 22, 2012)

Dunedin said:


> The tax exemption relates to non US earnings of a US citizen, so does not apply in current circumstances.


You're right, I was thinking back to my last calculations, when i was considering a job overseas.


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## Bevdeforges (Nov 16, 2007)

Let's be careful here. The OP is talking about the US-SPAIN tax treaty, not the UK one.

There are a number of variations amongst the tax treaties here in Europe. And I note that the OP is citing the section on Government Pensions - by which I believe is meant a pension paid for having worked for the government. US Social Security and other sorts of pensions are covered in the Spanish treaty under Article 20. 

Yeah, I know - one more confusion thrown in with all of this. But it does really depend on what you mean by a "government pension" - US Social Security or a pension received based on having worked for the US Government.
Cheers,
Bev


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## Dunedin (Aug 12, 2013)

My comments were based on the US Spain tax treaty. It is different from the UK US double tax treaty. However the savings clause is the same (and appears in all US tax treaties)

The position for government pensions was outlined in my earlier note.

Non government pensions are normally dealt with under Article 20. The savings clause for US citizens only preserves Article 20(4) from that article; this relates to child maintenance. Therefore there are no restrictions from the tax treaty on the US taxing non-government pensions. It is therefore taxable in the US.


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## gm197 (Apr 22, 2012)

Yes I am referring to a pension based on having worked for the federal government.


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## iota2014 (Jul 30, 2015)

Dunedin said:


> I think that Iota is correct. The structure is as follows-
> •	Article 1(3), which would be termed a savings clause, preserves the right of the US to tax its citizens as if the treaty did not apply.
> •	gm197 is a US citizen and therefore most of the treaty is irrelevant.
> •	Article 1(4) preserves some limited parts of the treaty. 1(4)(b) appears to preserve Article 21, government service, but does not do so for individuals who are citizens of that state.
> ...


Isn't there an alternative possible interpretation?

* Under Article 21 the source country has exclusive taxing rights on government pensions, but cedes the taxing rights to the residence country if the recipient is a national of the residence country.
* In this case, the OP is a national of Spain so Spain acquires the taxing rights.
* Since the OP is also a US citizen and subject to the Saving Clause, the US can also tax the pension, but must give relief for Spanish tax.

I can't figure out which way to interpret it. That's why if it was me I would take the easy way out and ask Spain.


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## Elyles (Aug 30, 2012)

Dunedin said:


> My comments were based on the US Spain tax treaty. It is different from the UK US double tax treaty. However the savings clause is the same (and appears in all US tax treaties)
> 
> The position for government pensions was outlined in my earlier note.
> 
> Non government pensions are normally dealt with under Article 20. The savings clause for US citizens only preserves Article 20(4) from that article; this relates to child maintenance. Therefore there are no restrictions from the tax treaty on the US taxing non-government pensions. It is therefore taxable in the US.




Every year we file for a US tax form that says that we paid US taxes and are therefore exempt here. It's a blessing because the taxes are higher here. We are not taxed on our pensions here because the Spanish government does not consider this income. We have asesores here as well as CPA's stateside, keeping all bases appropriately covered. 


Sent from my iPad using Tapatalk


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## Dunedin (Aug 12, 2013)

iota2014 said:


> Isn't there an alternative possible interpretation?
> 
> * Under Article 21 the source country has exclusive taxing rights on government pensions, but cedes the taxing rights to the residence country if the recipient is a national of the residence country.
> * In this case, the OP is a national of Spain so Spain acquires the taxing rights.
> ...


gm197 mentioned that he was a Spanish citizen. The wording of Article 1(4)(b), while not a model of clarity, would seem to deny the benefit of Article 21 to US citizens who are also Spanish citizens.


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## iota2014 (Jul 30, 2015)

Dunedin said:


> gm197 mentioned that he was a Spanish citizen. The wording of Article 1(4)(b), while not a model of clarity, would seem to deny the benefit of Article 21 to US citizens who are also Spanish citizens.


But which country has primary taxing rights?

If Spain has primary taxing rights, the US should give relief. Spain would then get the full tax due under Spanish tax law. 

If the US has primary taxing rights, Spain should give relief. The US would then get the full tax due under US tax law.

Does the OP's US citizenship have the effect of shifting primary taxing rights from Spain back to the US? Or does the country of residence retain the primary taxing rights, just as if the OP was not a USC?


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## iota2014 (Jul 30, 2015)

iota2014 said:


> But which country has primary taxing rights?
> 
> If Spain has primary taxing rights, the US should give relief. Spain would then get the full tax due under Spanish tax law.
> 
> ...


Reading the paragraph again, it appears to me that Spain has the primary taxing rights, because of the OP's Spanish nationality.



> (a) Any pension paid by, or out of funds created by [the US] or a political subdivision or a local authority thereof to an individual in respect of services rendered to [the US], shall be taxable only in the US.
> (b) However, such pension shall be taxable only in [Spain] if the individual is a resident of, and a national of, Spain.


So I think the US should give tax relief (might require re-sourcing).


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## Dunedin (Aug 12, 2013)

iota2014 said:


> But which country has primary taxing rights?
> 
> If Spain has primary taxing rights, the US should give relief. Spain would then get the full tax due under Spanish tax law.
> 
> ...


The US taxes US source income, irrespective of the residence or citizenship of the recipient. Spain taxes the worldwide income of its residents. Under Article 24(1)(a) Spain is obliged to give credit for US tax (other than any that is imposed solely on the grounds of citizenship).


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## iota2014 (Jul 30, 2015)

Dunedin said:


> The US taxes US source income, irrespective of the residence or citizenship of the recipient. Spain taxes the worldwide income of its residents. Under Article 24(1)(a) Spain is obliged to give credit for US tax (other than any that is imposed solely on the grounds of citizenship).


My take: Since Spain has the primary taxing rights under Article 21, the US can only tax the pension on the grounds of (the OP's US) citizenship. The US may carry on with the withholding but should refund.

But that's just my opinion. if I was the OP, I would ask Spain, and act accordingly.


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## iota2014 (Jul 30, 2015)

The US doesn't always tax US source income. My SSA pension, for instance, is not taxed by the US. It all depends on the treaty.

And yet taxpayers get no help from either country in trying to understand the applicable treaty. Snot fair.


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## iota2014 (Jul 30, 2015)

iota2014 said:


> My take: Since Spain has the primary taxing rights under Article 21, the US can only tax the pension on the grounds of (the OP's US) citizenship. The US may carry on with the withholding but should refund.


Correction. If my reading is correct, the US should pay the pension without withholding, just as it does for my SSA pension, because in both cases the relevant treaty gives the country of residence not just _primary_ taxing rights, but _exclusive_ taxing rights.

No need to report the treaty income on the 1040 at all, as it's exempt under a treaty, and no need to file 8833 as 8833 reporting is waived for pension income.

Again, this is just my view, OP - not to be relied on.


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## Dunedin (Aug 12, 2013)

iota2014 said:


> The US doesn't always tax US source income. My SSA pension, for instance, is not taxed by the US. It all depends on the treaty.
> 
> And yet taxpayers get no help from either country in trying to understand the applicable treaty. Snot fair.


The starting point is that under US domestic rules, the US taxes US source income. Sometimes this is overridden by a tax treaty.

But getting help? It seems to me that apart from views from a forum like this, you are on your own.


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## iota2014 (Jul 30, 2015)

Dunedin said:


> The starting point is that under US domestic rules, the US taxes US source income. Sometimes this is overridden by a tax treaty.
> 
> But getting help? It seems to me that apart from views from a forum like this, you are on your own.


Yes. Except in a case like the OP's, where it's not clear if the residence country will or will not tax something. European tax agencies generally don't mind telling you if an item of income is or is not taxable. Unlike the IRS.


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## Bevdeforges (Nov 16, 2007)

Let me just interject something here. I have not read the Spanish tax treaty, but in the French one, there are a few articles toward the end of the treaty that discuss the specific remedies available in each country for taxing or not taxing or exempting various types of income mentioned earlier on in the treaty.

For the US side of things, they normally state something to the effect that you have to use the Foreign Tax Credit (unless you take a "treaty position" I suppose, with the additional form and all). And on the French side, it does actually mention that there is the "tax credit" approach (basically a credit granted by the French to cover French tax generated by the item - not important the details). Check the last several articles of the Spanish tax treaty to see if there is any mention of how each side does their "tax relief." 
Cheers,
Bev


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## gm197 (Apr 22, 2012)

I forgot to make this a little more complicated - this would be a disability pension. Not Social Security Disability but a federal government pension for being disabled. I think disability pensions are treated differently in Spain.


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## iota2014 (Jul 30, 2015)

This from https://www.irs.gov/businesses/the-taxation-of-foreign-pension-and-annuity-distributions might help clarify:


> *General Rule: Treaties—Pension/Annuity Articles*
> 
> As a general rule, the pension/annuity articles of most tax treaties allow the country of residence (as determined by the residency article) to tax the pension or annuity under its domestic laws. *This is true unless a treaty provision specifically amends that treatment.* Some treaties, for example, provide that the country of residence may not tax amounts that would not have been taxable by the other country if you were a resident of that country. In some cases, government pensions/annuities or social security payments may be taxable by the government making the payments. There also may be special rules for lump-sum distributions. You need to look at each treaty carefully.
> 
> ...


Article 20 is consistent with the above: a US Government pension is taxable exclusively by the US when paid to a Spanish resident who is not a Spanish national; a US Government pension is taxable exclusively by Spain when paid to a Spanish resident who is a Spanish national; a US government pension is taxable by both countries when paid to a dual US/ES citizen resident in Spain, and the US must give relief because the US taxation is due solely to citizenship. (Which is where the effect of the Saving Clause is seen.)

A Spanish government pension is taxable exclusively by Spain when paid to a US resident who is not a US citizen and does not have PR; a Spanish government pension is taxable exclusively by the US when paid to a US resident who is neither a US citizen nor a PR. (Which fits exactly with Publication 901.  )

The OP will not be able to claim exemption from the US withholding and must instead claim a refund by re-sourcing the pension as foreign income and claiming FTCs.

IMO.


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## iota2014 (Jul 30, 2015)

gm197 said:


> I forgot to make this a little more complicated - this would be a disability pension. Not Social Security Disability but a federal government pension for being disabled. I think disability pensions are treated differently in Spain.


If paid in respect of work you did for the Federal Government, it comes under the Government Service Article.


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## iota2014 (Jul 30, 2015)

Mornington Crescent.


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## iota2014 (Jul 30, 2015)

iota2014 said:


> A Spanish government pension is taxable exclusively by Spain when paid to a US resident who is not a US citizen and does not have PR; a Spanish government pension is taxable exclusively by the US when paid to a US resident who is neither a US citizen nor a PR.


Correction - typo. Should read:

A Spanish government pension is taxable exclusively by Spain when paid to a US resident who is not a US citizen and does not have PR; a Spanish government pension is taxable exclusively by the US when paid to a US resident who is a US citizen or has PR.


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