Pilar worked for fifteen years at a hotel in Geneva and then returned to Málaga, where she paid contributions for another twenty until she retired. Today she receives two pensions: a Spanish Social Security pension of 21,000 € and one from the Swiss system, equivalent to about 12,000 € a year, plus a small company top-up. She lives in Málaga all year round. Every spring she asks herself the same question: do I declare the Swiss one in Spain, in Switzerland or in both? And every year she gets a different answer depending on whom she asks.
The confusion is understandable, because there is no answer for "the pensions", only one for each pension, and on top of that the result for one affects the tax on the other.
First where you live, then each pension on its own
The analysis always follows the same order, and skipping a step causes almost every mistake:
- Tax residence. If you are resident in Spain (more than 183 days a year, or with the centre of your interests here, under article 9 of the Spanish personal income tax act (IRPF)), you are taxed in Spain on your worldwide income. If there is a conflict with another country that also treats you as resident, the treaty's tie-breaker criteria resolve it.
- Classifying each pension. For each one you identify which article of the treaty with the paying country applies: private pension, pension for public services, social security pension with its own rule, life annuity.
- Method for avoiding double taxation. If the treaty allows the paying country to tax, you look at how the country of residence corrects it: with an exemption or with a credit for the tax paid abroad.
- Applying it in the Spanish return. Only then is the return filled in.
Pilar is resident in Spain, so her starting point is that both pensions go into her Spanish return. What remains to be known is whether the Swiss pension is taxed only here, or whether Switzerland may tax it too and Spain must correct that double taxation. The Spain-Switzerland treaty says so in its articles on pensions, which must be read with the pension documents in front of you. How Switzerland treats it on its side is Swiss law, and Pilar's adviser there confirms it.
The progressivity trap
Spanish income tax (IRPF) is progressive: the larger the base, the higher the rate on each additional euro. When two pensions are added together, the average rate rises for both. That is why a foreign pension that "pays nothing here" can nevertheless make the Spanish one more expensive.
When they exempt income in the country of residence, many treaties allow it to be taken into account to calculate the rate applying to the rest. This is known as exemption with progression. The practical result is that the foreign pension pays no tax in Spain, but the Spanish one is taxed at the rate that would apply to the whole. Declaring only the Spanish pension because "the other one is already taxed abroad" is a filing error, not an option.
The double taxation credit, with figures
When the treaty allows both countries to tax the same pension, a Spanish resident includes it in their base and applies the credit in article 80 of the IRPF act. The law requires the lower of two amounts to be deducted:
- what was actually paid abroad in a similar tax on that income;
- the result of applying the Spanish average effective rate to the part of the taxable base taxed abroad.
The average effective rate is found by dividing the total net tax by the taxable base, multiplying by 100 and stating it to two decimal places, keeping general income and savings income apart.
Suppose, with figures made up for the example, that Pilar's general taxable base is 33,000 € and her total net tax is 7,800 €, and that Switzerland has withheld 2,100 € on her 12,000 € pension:
- Average effective rate: 7,800 / 33,000 × 100 = 23.64 %.
- Limit by average rate: 12,000 × 23.64 % = 2,836.80 €.
- Tax paid abroad: 2,100 €.
- Credit: the lower of the two, 2,100 €.
If Switzerland had withheld 3,200 €, the credit would stop at 2,836.80 €, and the 363.20 € difference would not be recovered in Spain. Whether that excess withheld there can be claimed back is determined by the treaty and the Swiss administration. The full mechanism, with more cases, is in the international double taxation credit.
The credit requires evidence of what was actually paid abroad. A withholding that is later refunded to you there is not tax paid. Keep the foreign withholding certificate and, if you file a return in the other country, its final assessment: that is what will be requested if Hacienda (the Spanish tax authorities) reviews the credit.
If the person receiving both pensions lives outside Spain
The reverse case works differently. Imagine that Pilar lived in Switzerland and received both pensions there. Spain would no longer tax her worldwide income: as a non-resident, it could only tax income arising in Spain, and only if the treaty allowed it. If the Spanish pension remained taxable here, it would be taxed under non-resident income tax (IRNR) with its own pension scale, calculated on the Spanish pension alone, without adding the Swiss one and without progression for the rest of her income.
| Pilar lives in… | What she declares in Spain | How it is calculated |
|---|---|---|
| Spain | Both pensions | IRPF on worldwide income, with exemption or credit under the treaty |
| Switzerland | Only the Spanish one, if the treaty allows | Non-resident pension scale on that pension |
| A third country | Only the Spanish one, if that country's treaty allows | As in the previous row |
When a non-resident's Spanish pension is taxed here and when it is not is developed in is my Spanish pension taxed in Spain or where I live.
Three pensions that are not the same thing three times
Pilar also has a Swiss company top-up. Foreign systems often have several pillars (state pension, compulsory occupational schemes, private savings), and each can fall under a different article of the treaty. A state pension based on contributions, an occupational plan and a life annuity taken out with an insurer may be treated differently even if they reach the same account on the same day. And if any of them is taken as a lump sum, the classification may change again.
That is why the first job in these cases is an inventory: which pensions there are, who pays them, on what basis and in what form. You can send it to us through the pensioners form, stating for each one the paying country, the annual amount and the document that grants it.
The foreign account the pension is paid into
A practical detail that is often forgotten: if you are resident in Spain and the foreign pension is paid into an account opened in the other country, that account may require you to file Modelo 720 (the Spanish return reporting assets held abroad) if, added to your other accounts abroad, it exceeds 50,000 € at 31 December or as an average balance for the last quarter. It is an information return separate from income tax and does not depend on where the pension is taxed. We explain it in I receive a pension from another country and live in Spain.
What changes when one of them is a civil service pension
If one of the pensions rewards services rendered to a public administration, the treaty usually reserves it to the paying State. For a Spanish resident with a foreign public pension, that usually means an exemption here, but with progression: it is declared, it pays nothing and it raises the rate on the rest. How the public pensions article works is set out in public or private pension.
Combining pensions from several countries in a single return, and coordinating with whoever handles the client's taxes in the other State, is one of the situations we describe at Salama Tax for pensioners whose working lives were spread across countries.