US Social Security and Pensions in Spain: What the Tax Treaty Says

The treaty does not exempt a US citizen living in Spain from either country’s tax. For Social Security (art. 20(1)(b)), both countries may tax it and Spain gives relief for US tax. For private pensions (art. 20(1)(a)), Spain, as your country of residence, is the one with the exclusive right to tax, but the US keeps taxing its citizens anyway. For US government pensions (art. 21(2)), the US has the exclusive right.

The text is the 1990 US-Spain convention as amended by the 2013 protocol, both listed on the IRS treaty page. The IRS Technical Explanation, written by the US Treasury, is the best guide to what each article means.

The rule that overrides the rest: the saving clause

Article 1(3) says that, whatever else the treaty says, the US “by reason of citizenship may tax its citizens, as if the Convention had not come into effect.” So for a US citizen the treaty mostly decides who must give relief, not whether the US taxes you. Spain taxes you as a resident and the US taxes you as a citizen. Article 24 then removes the overlap:

• Spain deducts the US income tax actually paid on income the treaty lets the US tax, other than solely because you are a citizen (art. 24(1)(a)). The deduction cannot exceed the Spanish tax attributable to that US income.
• The United States allows a credit for Spanish income tax (art. 24(2)(a)), and for a US citizen resident in Spain it treats citizenship-based income as arising in Spain to the extent needed to avoid double taxation, while the US tax never falls below what a non-citizen would pay (art. 24(3)).

The credit is claimed on Form 1116; see US taxes for Americans in Spain.

Rule by rule

Income	Treaty article	Who may tax
US Social Security (also Railroad Retirement)	Art. 20(1)(b), protocol provision 15	Both. Paying country (US) may tax; not exclusive.
401(k) and other employer pension distributions	Art. 20(1)(a)	Residence country (Spain) only, except the US can still tax its citizens (art. 1(3))
IRA distributions	Art. 20(1)(a) or art. 23, unclear	See below
Annuities	Art. 20(2)	Residence country (Spain) only, subject to the saving clause
US federal, state or local government pension	Art. 21(2)(a)	US only
Pension earnings while still in the plan	Art. 20(5) (2013 protocol)	Not taxed by Spain until distributed

Social Security

Article 20(1)(b) says social security benefits paid by one country to a resident of the other, or to a US citizen, “may be taxed in the first-mentioned State”. The Technical Explanation spells out the consequence: this is not an exclusive right, so the benefits “may be taxable in both Contracting States,” with the country of residence allowing relief under article 24 for tax imposed by the paying country. In practice Spain is the country that has to give you credit for what the US took. The 1990 protocol (provision 15) extends the same rule to pensions paid from publicly administered funds for non-governmental services, such as US Railroad Retirement.

The treaty text does not say how much of your benefit Spain includes in income, or how any exemption or reduction works. That is Spanish domestic law, so have a Spanish tax adviser (asesor fiscal) confirm it for your case.

401(k) and employer pensions

Article 20(1)(a) covers “pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment”, taxable “only in that State”, meaning your country of residence. That is Spain once you are a resident. For a US citizen the saving clause still lets the US tax the distribution, and article 24 gives the relief above.

The 2013 protocol added article 20(5). If you take part in a pension fund in the other country, your country of residence may tax the fund’s earnings only when they are paid to you. The Treasury’s explanation gives the example of a US citizen who contributes to a US qualified plan, then moves to Spain: Spain cannot tax the plan’s earnings each year, only distributions. An understanding attached to the protocol lists the US plans counted as “pension funds”: 401(a) plans (including 401(k)), 403(a), 403(b), IRAs under section 408, Roth IRAs under section 408A, SIMPLE and SEP plans, 457(b) plans and the Thrift Savings Fund.

IRAs and Roth accounts: where the text is ambiguous

IRAs and Roth IRAs are named as pension funds for article 20(5), so their growth is protected from yearly Spanish tax. Article 20(1)(a), though, speaks of pensions “in consideration of past employment”. A traditional IRA funded by a rollover from a job plan fits that wording more easily than one funded by your own contributions, and the treaty text does not settle the point. Distributions that fall outside articles 20(1)(a) and 20(2) would go to article 23 (Other Income), which the Treasury’s explanation describes as giving the residence country exclusive taxing jurisdiction. Either way Spain taxes you as the resident and the US taxes you as a citizen. How Spain taxes a Roth distribution that is tax-free in the US is not answered by the treaty. Ask an adviser about the IRA and Roth points only.

US government pensions

Article 21(2)(a) says a pension paid by or out of funds of a country, or a political subdivision or local authority, for government service is “taxable only in that State”. For a federal, state or local government pension that means the US. The exception, art. 21(2)(b), applies only if you are both a resident and a national of the other country, so someone with Spanish nationality living in Spain falls under it. The Technical Explanation adds that the saving clause overrides article 21 for US citizens and green-card holders, so the US can tax them in any case. If you are a dual US and Spanish national, have an adviser confirm which rule applies to you.

Getting paid while living in Spain

The SSA runs a Payments Abroad Screening Tool that tells you whether your retirement, disability or survivor payments continue “indefinitely, stop after six consecutive calendar months, or if certain country specific restrictions apply.” The six-month rule on the SSA’s payments page is described for non-citizens, who must leave the US for at least 30 days to trigger it and who may qualify for an exception. Run the tool with your citizenship and Spain as the country before you leave.

To claim from Spain, the totalization-agreement page says you can contact the Federal Benefits Unit at the US Embassy in Madrid (Serrano 75, 28006 Madrid, fbu.madrid@ssa.gov), or any Spanish social security office.

If you still work: the totalization agreement

The US-Spain social security agreement stops you paying into both systems for the same work. For self-employed people, the SSA states that those who reside in Spain are assigned Spanish coverage and those who reside in the US are assigned US coverage; someone who moves the business to the other country for five years or fewer stays under the original system. Employees sent to work in Spain need a certificate of coverage (form E/USA 1) from the Spanish treasury office (TGSS) in the province where the employer sits to be exempt from US coverage. Credits can also be combined: for a partial US benefit you need at least six US credits (generally one and a half years of work), and for a Spanish benefit at least one year of coverage in Spain.

The agreement covers social security contributions, not income tax. Your income tax position depends on the treaty rules above.