Monday, May 23, 2011

Do I have to pay Spanish taxes on my IRA distributions?

Spain doesn’t tax deferred compensation for work performed while not a resident of Spain. This also applies to other kinds of deferred compensation, like unvested stock awards. (This is actually kind of cool, because the US doesn't tax stock awards until they vest, so if you move here with a bunch of unvested stock awards, and give up your green card, you may end up paying very little in taxes on your stock awards when they vest)

The bigger problem is whether you have to pay US taxes on your IRA distribution. If you are a US citizen or Green Card holder, sorry, you’re going to get taxed on it (if you have excess foreign tax credits, you might be able to avoid any net additional taxes). And no, the Foreign Earning Income Exclusion does not apply, as pensions are not considered “earned income”.

If you are not a US resident for tax purposes, then make sure you cite the US/Spain tax treaty, which gives Spanish residents the right to have their pensions *only* taxed by Spain (ie not).


Anonymous said...

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By my interpretation of the Spain/US Tax treaty on pensions, it seems to me that I would have to pay taxes in Spain once I start withdrawing from my IRA, although it is a deferred pension from income earned while being a US resident. Given your initial statement on this post I am probably wrong, but I wanted to run it through you just in case.

Pensions, Annuities, Alimony, and Child Support
1. Subject to the provisions of Article 21 (Government Service):
(a) pensions and other similar remuneration derived and beneficially owned by a
resident of a Contracting State in consideration of past employment shall be taxable only in that

Also from the Spanish version of the treaty:

Ejemplo: Contribuyente, residente fiscal en España, cuya única renta en 2013 es una pensión procedente de Estados Unidos, causada por haber trabajado en una empresa en dicho país. (España tiene en general la potestad exclusiva de gravamen por ser una pensión privada. El tratamiento en el Convenio se explica a continuación). Si la pensión supera la cuantía de 11.200 euros anuales, atendiendo a los límites y condiciones de la obligación de declarar relativa al ejercicio 2013, estaría obligado a presentar declaración por el IRPF correspondiente a 2013, puesto que el pagador de la pensión estadounidense no está obligado a practicar retenciones a cuenta del IRPF español.


santcugat said...

The key point is whether Spain considers an IRA withdrawal a pension.

You could argue that an IRA is really just a US-tax advantaged savings account that isn't recognized by Spain as anything special.

However, then you would theoretically need to pay Spanish taxes on any income you receive within the IRA as if it were a regular brokerage account.

Anonymous said...

So if I'm a US citizen, it seems that I will be taxed twice for my IRA withdrawals, in the US and Spain. I hope that's not the case... the CDI (tax treaty) does not seem to apply when you are a US citizen.

Am I missing something?


santcugat said...

1. I think you can make a reasonable argument that an IRA withdrawal is not a pension payment. In that case it would not be taxed in Spain at all.

2. The double-taxation part of the US tax treaty still applies to US citizens. The only restriction on US citizens is that if you would pay *less* taxes on income in Spain than you would in the US, then you need to pay the difference. Taxes you pay in Spain can be used as foreign tax credits to lower the amount you owe for US taxes (including US taxes on IRA withdrawals).