Rosario spent thirty-four years as an administrator at a haulage company in Zaragoza and retired on a Social Security pension of 1,650 € gross paid fourteen times a year: 23,100 € a year. Three years ago she went to live near her daughter in Belgium. Her brother Luis, who taught at a secondary school as a permanent civil servant, moved at the same time to the same city. They receive almost the same amount and live on the same street, yet the question in the title has a different answer for each of them. The reason lies neither in the amount nor in the country: it lies in why each pension is paid.
What decides it is the treaty, not the bank
When someone who no longer lives in Spain receives a Spanish pension, two sets of rules come into play at once. Spanish law says that the pension is income arising in Spain: article 13.1.d) of the Spanish non-resident income tax act treats pensions as obtained here "when they derive from employment performed in Spanish territory or when they are paid by a person or entity resident in Spanish territory". If that law were all there was, Spain would always tax them.
But Spain has a treaty for the avoidance of double taxation with most countries, and the treaty takes precedence. Almost all of them follow the OECD model, which separates two situations:
- Pensions for past employment in the private sector (article 18 of the model): the usual rule is that only the country where the recipient lives taxes them.
- Pensions for services rendered to the State or to a public administration (article 19 of the model): the usual rule is the opposite, the paying State taxes them, with a qualification we cover in I am a retired civil servant living abroad.
Rosario's pension comes from a working life in the private sector: normally the treaty gives it to Belgium. Luis's pension rewards services he rendered as a civil servant: normally it continues to be taxed in Spain. We say "normally" on purpose, because each treaty has its own wording and some depart from the model on this very point. The applicable article is always read in the text published in the BOE (the Spanish official gazette), not in a summary.
The Social Security pension is the one that confuses people most
There is a trap in the language. Rosario's pension is paid by a public body, the national Social Security institute (INSS), and many people conclude from this that it is a "public pension" under article 19. In most treaties it is not: article 19 looks at whether the pension rewards services rendered to an administration in the exercise of public functions, not at who signs the transfer. A contributory pension earned at a private company follows, as a rule, the article on private pensions, even though a State body pays it.
Some treaties signed by Spain do, however, contain their own rules for Social Security pensions that allow the paying country to tax them as well. That is why there is no shortcut: you have to read the treaty with your country of residence. The detailed comparison of the two articles, with the borderline cases, is in public or private pension.
| Source of the pension | Usual article of the OECD model | Who normally taxes it |
|---|---|---|
| Social Security for private employment | 18 | Country of residence |
| Pension plan or company annuity | 18 | Country of residence |
| Clases pasivas (the civil service pension scheme) for services as a civil servant | 19.2 | Spain, as the paying State |
| Contract staff of a public administration | Depends on the wording | The treaty has to be read |
What happens if nobody lifts a finger
Here is the real cost of the question. The Spanish payer does not know where you live or which treaty applies to you. If you give it no evidence, it will do one of two things: keep withholding as if you lived in Spain or, if it already has your address abroad on file, apply the non-resident income tax scale for pensions without taking the treaty into account.
That scale is in article 25.1.b) of the act: 8 % up to 12,000 € a year, 30 % from 12,000 to 18,700 € and 40 % above that. Let us see what it means for Rosario if the payer simply applies it:
- First band: 12,000 € at 8 % = 960 €.
- Second band: from 12,000 to 18,700 €, that is 6,700 € at 30 % = 2,010 €. Running total: 2,970 €.
- Remainder: 23,100 − 18,700 = 4,400 € at 40 % = 1,760 €.
- Total withheld in the year: 2,970 + 1,760 = 4,730 €, an average rate of about 20.5 %.
If the treaty with her country gives the pension to Belgium alone, those 4,730 € a year are not owed in Spain. And since Belgium will presumably also want to tax it under its own law (something only her adviser there can confirm), Rosario would be paying twice on the same income.
The fact that the payer withholds does not mean the tax is owed. Withholding is a payment on account worked out by the payer with the information it has. If that information is incomplete, the withholding is wrong, but the money has already left your account and only comes back if you ask for it. Recovering it is subject to a deadline, and every year that passes without a claim is a year that may be lost.
Putting it right going forward and going back
These are two separate steps, and it pays not to confuse them.
Going forward, you prove your tax residence in the other country to the payer with the certificate issued by the tax administration there, issued for the purposes of the treaty with Spain. With it, the payer can stop withholding, or withhold only what the treaty allows. The details of that document (who issues it, how long it lasts, what wording it must carry) are in the certificate your payer needs and in whether you have to request it every year.
Going back, what was over-withheld in earlier years is claimed from the Agencia Tributaria (the Spanish tax agency) with a refund return for each year, within the four-year limit. We explain it with figures in tax is withheld in Spain and I also declare it where I live.
If you would like us to look at your case with the treaty in front of us, the pensioners form collects what we need: which scheme the pension comes from, where you have lived and since when, and what has been withheld in recent years.
Luis, the civil servant brother: what changes for him
For Luis the practical outcome is different. If the treaty with his country reserves his clases pasivas pension to Spain, the Spanish withholding is not a mistake: Spain taxes as the paying State and, since he does not live here, it does so through non-resident income tax with the scale we have just seen. What Luis needs to check is something else: whether his country of residence requires him to declare it and how double taxation is avoided there. That is a matter for the other country's law, and the adviser Luis has there confirms it; we coordinate with that adviser by supplying the Spanish side.
Three items to gather before asking
The answer is always built from the same materials, and hardly anyone has them together:
| Document | What it is for |
|---|---|
| Decision granting the pension | States which scheme it comes from and for what services it is paid |
| Withholding certificate for each year | Shows how much has been withheld and on what basis |
| Proof of tax residence in the other country | Allows the treaty to be applied and a claim to be made |
With those three documents it is possible to say which article of the treaty applies, whether the withholding adds up and whether there is anything to recover. Without them, any answer is guesswork, and in this area guesswork is expensive: the difference between getting it right and getting it wrong is several thousand euros a year, year after year.
Why tax residence comes first
Everything above assumes something that has to be checked: that you really have stopped being tax resident in Spain. Spanish law treats you as resident if you spend more than 183 days here in the calendar year or if the main centre of your economic interests is here, and presumes that you are if your spouse, not legally separated, and your dependent minor children live here. A pensioner who spends half the year in each country, or who keeps a home, accounts and a spouse in Spain, may still be resident here even though they feel they live abroad. In that case there is no treaty allocation to make: they are taxed in Spain on everything, and the question becomes a different one, how a dual residence conflict is resolved.
The annual follow-up of pensions received abroad (certificates, notices to the payer and refunds) is one of the areas of work at Salama Tax, where we describe how it is organised and what documents are usually needed for each type of pension.