Taxation of Foreign Pension Plans in Spain

Summary:

The first step in determining the implications of a foreign pension plan in Spain is to verify that the plan meets the requirements set forth in the Spanish regulation.

Taxation of Foreign Pension Plans in Spain

The main purpose of this post is to analyse the main implications derived for individuals who are considered as tax resident of Spain in respect of their Pension Schemes.

Many of our clients are holders of different financial products in their home countries that, although they have similarities with the Spanish Pension Plans, they do not meet the definition of a Pension Plan provided in the Spanish Law.

Therefore, the first step to conclude about the Spanish Tax Treatment of a foreign Pension Plan is to verify that the “product” meets the requirements set forth in the Spanish regulations. Specifically, the following basic principles:

  • Not discrimination: any individual who meets the conditions of connection or capacity to contract with the promoter, may have access as a participant in the plan.
  • Capitalization: The plans must be implemented trough financial and actuarial capitalization system and the corresponding distributions from the plan will be adjusted to the calculations derived from those systems.
  • Irrevocable: promoters’ contributions will be irrevocable.
  • Rights: participant’s contributions will determine the rights of retirement, work and severe disability, death of the participant or beneficiary and severe dependence of the participant.

In case of meeting the above requirements, the foreign scheme will be considered as a pension plan from a Spanish Perspective and the following implications will apply:

  • Contributions made to the plan may reduce the taxable base of the Personal Income Tax, as long as the plan is located in the European Union and meets additional requirement provided in the Spanish Law.
  • Ditributions from the plan, unless otherwise indicated in a Double Tax Treaty, will be considered as employment income. In case these benefits are also subject to tax in the country where the Plan is located, the individual will be able to claim for the corresponding double tax credit in Spain.
  • There will be no obligation of reporting the Plan in Form 720 or for the purposes of filing the Net Wealth Tax Return.

Some examples of foreign plans to be included under this group are the following: 401(K) Plan and traditional IRA (Individual Retirement Account) from the USA, QRPPS (Qualifying Recognised Overseas Pension Scheme) and SIPP (Self-invested personal pension) from The UK and RRSP (Registered Retirement Savings Plan) from Canada.

Those schemes that do not meet the above basic principles, will be considered as foreign investments.

  • Any distribution received from those investments will be considered as saving income (dividends, capital gains, interests, etc. depending on the structure of the investment).
  • In addition, a detail of the investment included in the Plan should be reported in Form 720 as well as in the Net Wealth Tax Return.

This is the case of Roth IRA Plans in the USA and ISA (Individual Savings Account) in the UK.

Despite this general information, a case-by-case analysis is recommended. At albea, we can help you to better understand the tax treatment and the relevant obligations arising from your pension plan.

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