Tax headaches from receiving a foreign pension

Many Europeans spend much of their holidays in Spain throughout their working life. Therefore, it’s understandable that once retired they want to have holidays all year round by becoming residents in Spain. What obligations do these retirees have with the Spanish tax authorities?

If you spend more than 183 days in Spain, you are considered a resident for tax purposes. In this case, you must declare all your income to the Spanish tax authorities, both income generated in Spain and any coming from abroad. However, even though the Spanish tax agency must be informed of all your income, this does not mean that you have to pay tax in Spain on all your earnings.

The international agreements between Spain and other countries to avoid double taxation aim to make sure that the tax you pay is legitimate and fair, and you can deduct tax paid abroad previously from tax owed in Spain.

Retirement pensions receive a special treatment that has caused much controversy in recent years because the double taxation rules were not given the same interpretation in different countries. For instance, public pensions can only be taxed in the country in which they are generated. But in recent years, public pensions have come to be interpreted to be only pensions received by retired civil servants.

Another problem is caused by pensions paid as a lump sum without any kind of withholding, typical in Germany. In this case, when the paying country wants to collect the tax it is legally owed, the lump sum may have already been taxed in Spain, without there having been any deduction of the foreign tax due because it had yet to be paid.

Given such complexities, you should always seek the advice of a tax specialist for clearing up any doubt surrounding your situation to avoid unpleasant surprises from the tax authorities in Spain or your home country.

Carlos Prieto Cid – Your legal adviser in Spain

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