Tax issues for Americans in Spain

Here's a collection of potential tax issues that face Americans and Green Card holders that live in Spain. First, one of the wonderful privileges of being American is that you have to file taxes no matter where you live. Even if you have no contact with America. Luckily, most of the world has higher income taxes than the US, so if you live in a country with a tax treaty with the US, you can usually avoid most of the pain.

Are you going to bother?

If you think, fuck it, this is stupid, you can probably get away with not filing anything as long as you stay abroad and don't have any US investments. Things get difficult if you move back to the US and you try to resume your life there. The IRS will probably wonder where you've been all these years and since there's no statute of limitations on unfiled taxes...

Your place or mine?

Use you current foreign address on the 1040 form, even if you still have a place in the US. Examinations generally can take place at the address given on the return, so the IRS has to be pretty motivated to send an agent overseas.

Foreign tax credits

Unless you moved to Spain under the "beckham-tax" rules, allowing you six glorious years of 24% flat income tax, most likely you don't owe any American taxes. You still need to file though. You can apply any income taxes (not social security, unfortunately) you paid to the Spanish government as a foreign tax credit.

You can carry-forward and carry-back your foreign tax credits. So after your last year of the Beckham tax, you can carry-back your excess tax credits back one year and get a big refund. Remember to fill out your Foreign Tax Credit Form twice, one for AMT, the other non-AMT.

Spanish company pension plans

You can get a private letter ruling from the IRS (which would probably cost you $25,000) stating that the plan qualifies by US rules, or go through the hassle of trying to pay taxes on it, or just say, fuck it, I've tried my best and this thing looks close enough to a 401k for me. (If it's a broad based plan designed mainly for non-Americans, at least it avoids Section 409, which is a nasty bit of law that was passed after the Enron scandals.)

The Foreign Earned Income Exclusion

This only worthwhile if you have a high income, the Beckham-tax rate, or get Employee Stock Awards, which are taxes at extremely low rates in Spain. This is because of the weird way the exclusion affects your taxes payable. Run it twice to see if it is really worthwhile.

I've heard that border guards have questioned people with Green Cards that use the Bonafide Residence Test. The key thing to note is that the a "bona fide residence" is not the same as your domicile/permanent home. From the IRS:

To see if you meet the test of bona fide residence in a foreign country, you must find out if you have established such a residence in a foreign country. Your bona fide residence is not necessarily the same as your domicile. Your domicile is your permanent home, the place to which you always return or intend to return.

It's somewhat debatable whether you can use Barcelona (the region) vs Barcelona the city for choosing your Housing Exclusion amount if you live in Sant Cugat. The safest thing to do would be to use the Spain (other) rate.

Remember if you claim the exclusion, you must reduce your foreign tax credit by the proportion of income you are excluding, since you cannot "double dip" and claim tax credits on income that you already excluded.

If you are married and both working, you can calculate the housing amount separately if you pay more rent than the housing exclusion allows.

If you used either exclusion in a previous year, you have to REVOKE it if you don't want to use it anymore. Once revoked, you need to wait six years before you can use it again unless you get special permission from the IRS.

Filing your taxes

Remember that you get an automatic extension for filing your taxes since you live outside the US, and it probably makes sense to wait to file your Spanish taxes so that you know the right amounts for your foreign tax credit. However, you still need to PAY by April 15th to avoid interest charges. I recommend using the government's electronic EFTPS system.

Sending your tax return with a check on April 15th will most likely get you stuck with a late fee unless you send it by UPS or FedEx. Foreign certified mail doesn’t count.

If you are married to a Spanish person who is not a resident of the US, you may be able to file as "Single/Head of Household" if you have dependents that are not your wife.

Tax traps

Careful about buying life-insurance or annuities in Spain. There is a 1% Federal Excise Tax on foreign insurance products. It's not entirely clear to me if the Spain/US tax treaty could be used to avoid this tax. Switzerland and the UK definitely have exemptions from this tax, so buy Swiss if you can. Alternatively, you can keep your American policy up-to-date. Most like it will be far cheaper than anything you can find here.

Generally stay away from non-US mutual funds/money market funds. PFIC rules are a bitch, and now with the new HIRE act, will be reportable even if you don't sell them.

If you do decide to buy foreign funds, talk to your tax advisor about segregating them in a QBU (Qualified Business Unit). This can allow you to avoid taking foreign exchange gains/losses until you take the money out of the account.

Stay away from "financial advisers" who cold call foreigners. Most likely they will try to sell you some fee-laden piece of junk, that will then explode, lose all your money, and then leave you with a big tax bill for money you never got. Ask them if they are licensed to sell securities to Americans and watch how fast they run away.

Buying a house

Owning a house has many of the same tax advantages as in the US. You get to deduct your mortgage interest and you get the same capital gains exemption on selling your primary residence as in the US.

However, there are several tricky issues:

If you take a loan in Euros to buy your house, and the Euro falls in value, you pay taxes on your "currency gain" on the repaid loan as ordinary income.

In addition, when you sell your home, you will have to convert to US dollars to calculate capital gains taxes. If the US dollar has dropped in value, you may owe much more in capital gains than you thought.

There's another wonderful law that says that you have to report and withhold 30% on any interest paid for non-US resident entities. The Spain/US tax treaty allows for loans that have a term of 5 years or more to be exempt from withholding as long as you 1) cite the tax treaty and 2) get some kind of proof that the entity you are paying is not US resident.

There are ways to legally avoid these these issues, but they take careful tax planning and need to be set up before the home is purchased.

Filing as a non-resident

If you only have a Green Card, you may be able to file as a non-resident by taking advantage of the tie-breaker residency test in the US/Spain tax treaty. You need to attach a 8833 form to your 1040NR to explain what you are doing.

Be aware of the fact that you may be putting your Green Card at risk if the US border guard decides to ask you about your taxes. In addition, you will run into problems applying for citizenship or a re-entry permit, since both forms ask you about filing as a non-resident.

Non-resident alien spouse

If you are here because you married an non-US citizen alien, you have one of the last legal tax avoidance available options to you. As long as your favorite alien can file as a US non-resident (or perhaps not at all if they don't have any assets or income from the US), you may be able to file as as "single" and leave all the income of your spouse out of any US declarations. If you have kids or other dependents, you may even be able to file as "single, head of household".

Before you attempt any of this, you should definitely talk to a tax advisor, since once you have this arrangement set up, any asset transfers between you and your spouse can have tax implications. In addition, should you ever get divorced, not having any assets in your name may come back to bite you quite severely.

26 comments:

Anonymous said...

Is it true that if your tax resedence is Madrid (rather than Catalonia), you pay no wealth tax?

santcugat said...

That is true. However, the tax authorities are starting to crack down on people who claim to live in Madrid, but work, have kids, own a house, etc somewhere else.

Anonymous said...

First of all THANK YOU for this! Second, what is AMT? And finally, I called the IRS from Spain and they said nothing about income tax but said the treaty with Spain meant I didn't have to pay Social a Security in the US. They told me to get a certificate from the Spanish soc sec office to show I was paying here. Could they have been misinforming me? Sincerely, Lost in Andalucia:)

santcugat said...

AMT = Alternative Minimum Tax. Most tax programs will do all the calculations for you and you don't need to worry about it.

Social security doesn't normally show up on your tax return unless you are self-employed, in which case it shows up as Self-Employment tax.

You need the certificate to show that you are exempt (but you won't be able to e-file), which you put at the front of your return.

Anonymous said...

Thank you so much! Do you know what kind of gov office we go to for this certificate? And what the certificate is called in Spanish? Thanks in advance (lost in Andalucia again, very lost when it comes to this!)

Anonymous said...

Does anyone know if Spain will tax a US Military retirement if I live as a resident in Spain?

santcugat said...

Pensions are generally taxed in your country of residence. You'll be able to use this as a credit on your US taxes.

Anonymous said...

Hello,

Thank you for the information.

I recently started a new job in Barcelona, Spain and they are applying the 24% tax rate on my salary, where it 'should be' only 15-16% according to the scale of the IRPF. Within the company, they say it's normal and that as soon as Hacienda confirms I am also a fiscal resident, this % will be changed to the 15-16%. However, my current payments appear to be irreversible and I will not recover the 'extra' taxes that I pay until I receive this fiscal resident confirmation. This strikes me as really unfair, people that should be paying more than 24% are being favored over people who should be paying less, it's actually a regressive tax system this way...

Would you happen to know if there's a way I could claim back the difference?

Many thanks in advance in case you are able to comment on this.

santcugat said...

You should get any extra money back as a tax refund once you file your Spanish 2015 tax return as a resident. You might also be able to reduce your tax withholding to less than 15% once you get your resident status (to make up for the extra money you paid).

Non-residents pay a flat 24% on Spanish income. The assumption is that you can apply this as a credit in your home country.

Oksana Solovieva said...

Extremely helpful page! Thank you !
Would please, recommend tax adviser here in Barcelona?
I have not filed in in many years. But now about to buy a flat and starting to get worried.

Anonymous said...

Hi,

I'm living in Madrid. Do you know someone, or yourself if so, that could help me with my tax filling? Thanks

Anonymous said...

Hi, Do you know of someone that could help me file my tax return? I am currently living in Madrid. Thanks!

Anonymous said...

Thank you for the information. Very helpful!

Do you happen to know of any tax specialists/gestores in American taxes in the Barcelona area? I have consulted with a few, but don't seem to find with experiencing filing. Online there are obviously expat tax services, but with remote, not local, services. Thanks again!

Anonymous said...

Thank you for this. I have a complicated situation and hope you can help. I have been living in Spain for many years now and now have a business of which I am part owner - 40% is mine. It is a partnership. I would like to return to the US (I am a citizen) and start my life again in the states, but continue to work for my Spanish business. So effectively they would still be paying my salary, but I would live in the states. I would return to being a US tax resident, as I would most likely be there about 9 months each year / in Spain 3 months for work stuff. How can I change my status in Spain to US tax resident? Or is this even possible, given the fact that I am still part owner of this business and they continue to pay me? I really appreciate any insight!

santcugat said...

You get a US certificate of tax residency and file as a Spanish non-resident when it comes to the end of the year. According to the tax treaty, once you are tax resident in one country, you are not anymore in the other. You would pay Spanish non-resident taxes on your salary (~24% flat), and credit that to your US taxes owed. Spain will be easy, the US will be more complicated. You need to talk to a US tax expert on how your partnership will be treated, and if it is considered a partnership or corporation for US tax purposes.

Also be careful about the Spanish exit tax:
http://ecija.com/sala-de-prensa/the-new-spanish-exit-tax-on-unrealized-gains-made-by-individuals-moving-abroad/

Anonymous said...

Wow, thank you so much for this. I had received such bad information before and it was expensive! Amazing that the "authorities" I went to in Spain didn't even know this, although they sure knew how to charge me money for worthless advice! The exit tax seems to be for people who really have money. My ownership interest is not worth more than 1mm, maybe if I am lucky it's 200-300,000 euros, so I don't think this affects me? Right? Thanks again!!!!

santcugat said...

For the US, the easiest is if you are a minority shareholder of a foreign corporation that is an active business (gets most of its earnings from selling stuff). If the business gets most of its income from passive sources (like dividends or interest), then it could be complicated from a US perspective and would get treated as a passive foreign investment company.

How is your entity incorporated in Spain? Does it pay taxes on income in Spain or does it pass through the profits to partners?

Here's the guide on how the entity would be treated in the US:

https://www.irs.gov/irm/part4/irm_04-061-005.html

USexpatinMadrid said...

Does anyone know of a good tax agent here in Madrid that can help with filing? For the past 3 years I have been using NML Colsulatores, but the guy who runs it is a nightmare. He never answers emails or returns phone calls and cites his busy overloaded in box as a valid excuse to give bad service. I am despertely looking for a new tax agent in Spain to handle my 2015 return and an IRS claim from 2013. Any help would be greatly appreciated.

JohnB said...

We are thinking of moving to Spain as retirees. We are currently retired in the USA. All of our income sources are from state retirement pensions, social security, IRA's and savings. How would these sources of income be treated in Spain for tax purposes?

Anonymous said...

I was wondering about US mutual funds (mostly US but partially international stock and some bonds) which is taxed in the US. Is this also taxed in Spain for US citizens that are Spanish residents?

Ken said...

this is what irs says in its questions and answers section:

8) I am a retired U.S. citizen liv-
ing in Europe. My only income is
from U.S. sources on which I pay
U.S. taxes. I am taxed on the
same income in the foreign
country where I reside. How do I
avoid double taxation?
If you reside in a country that has an
income tax treaty with the United
States, the treaty will generally con-
tain provisions to eliminate double
taxation. Many treaties will provide
reduced rates for various types of
income. Treaties often provide re-
ciprocal credits in one country for
the tax paid to the other country.
Nontreaty countries, depending on
their laws, may give the same type
of credit.
If double taxation with a treaty
country exists and you cannot re-
solve the problem with the tax au-
thorities of the foreign country, you
can contact the U.S. competent au-
thority for assistance. See chapter 6
for information on requesting con-
sideration

Anonymous said...

Hi! Very helpful info.
What if the US citizen has been living 10+ years in Spain, married to a spaniard, but isn't making money? ie, is an ama de casa?
Thanks!

H said...

Hi! Very helpful info.
What if the US citizen has been living 10+ years in Spain, married to a spaniard, but isn't making money? ie, is an ama de casa?
Thanks!

santcugat said...

If you are married to a non-US person (nonresident alien spouse), you can file as "married, separate" or "head of household" (if you pass some eligibility tests). If you had no income, you probably didn't need to file.

Your main problem (if you haven't filed any taxes) might be that you didn't file FBAR statements if you had a joint bank account in Spain with over $10,000. If you trust your spouse, you could keep everything under their name only and make sure that you are married in regimen de gananciales. I'd probably also make sure to have a power-of-attorney as well in case your spouse is incapacitated.

The way that the FBAR problem would bit you is if the bank reports you as a co-owner to the IRS, which they now have to due to the FACTA legislation.

There's some controversy whether a VISA card that is automatically paid by your spouse's account would count, but as long as it is not secured (ie pre-paid) it might be OK.

Jose said...

Hi,

I'm a U.S. green card holder exploring moving to Spain permanently and eventually surrendering the card. Can you tell me what would be the tax consequences to my U.S. pension and social security benefits of such a move?

Any help is appreciated!


santcugat said...

If you've had your greencard for more than 8 of the last 15 tax years, then you will be subject to the "exit tax", so if you are close to this deadline, and you think you might be covered (annual income over 162K or, networth of more than $2 million), you might want to give it up earlier.

There shouldn't be any social security impact unless you are still working, since Spain and the US have a social security totalization agreement, so you can transfer your social security credits to Spain.

Also, if you have a home in the US, it might be to your advantage to continue to be keep the greencard and stay a tax resident of the US, since then you would be a non-resident in Spain, which might lower your tax rate.

If you want a simple life, and you are moving here, my recommendation would be to give up the greencard before you hit the 8 years.