Tax neutrality in Spain for transfers of economic rights in U.S. pension schemes

In recent years, Spanish tax considerations regarding the transfers of U.S. pension schemes have gained significant relevance for individuals residing in Spain who hold U.S. individual retirement accounts, such as IRAs or SEPs. Key issues include whether these plans are exempt from wealth tax and the solidarity tax on large fortunes, as well as how distributions from these retirement accounts are taxed in Spain.

Another pertinent issue concerns the potential tax implications of transferring economic rights between retirement accounts and pension schemes held in the United States. As Spain taxes its residents on their worldwide income, any income from Spanish or foreign pension schemes obtained by Spanish tax residents is potentially subject to taxation in Spain, regardless of the retirement account or scheme’s location. This may mean that even rollovers between schemes considered tax neutral in the United States must comply with the neutrality requirements provided under Spanish tax law. These conditions encompass both Spanish regulations and the Spain–US Double Tax Treaty ("Spain–US DTT").

This issue has been unclear in the past, as Spanish tax provisions only directly regulate pension schemes governed by Spanish or European Union (EU) law. However, a recent tax ruling from the Spanish Directorate-General for Taxation (DGT) —V0251-25— has provided much-needed clarity regarding transfers between individual U.S. retirement accounts.

As mentioned, pension benefits from individual retirement accounts received by Spanish residents may be taxed in Spain. However, the above ruling confirmed that if these pension benefits are not directly paid to the holder but are instead transferred to another pension scheme within the U.S. retirement system, the Spain–US DTT establishes important rules that may defer the global tax burden associated with this transfer.

A key question is whether the individual retirement account whose economic rights are transferred qualifies as a pension scheme under the Spain–US DTT. The Spain–US DTT, updated through protocols and memoranda in 2019, adopts a relatively broad interpretation of which U.S. plans may qualify as “pension schemes.” Plans that typically qualify include US 401(k) accounts authorized under section 401.a) of the Internal Revenue Code, Simplified Employee Pension Individual Retirement Accounts (SEP IRA) under section 408(k), and Roth IRAs under section 408.a).

This treaty-based classification is critical because it determines whether transfers of economic rights can avoid immediate taxation in Spain under the newly introduced article 20.5 of the updated Spain–US DTT. As the economic rights remain within a qualifying U.S. pension scheme, taxation in Spain will generally be deferred until the individual receives a final distribution upon retirement or another qualifying contingency. This treatment ensures that neither Spain nor the United States penalizes legitimate pension rollovers within the U.S. retirement system.

However, specific restrictions and conditions apply. Transfers between qualifying U.S. pension schemes are generally not taxed in Spain, provided the economic rights are not made available to the individual or deposited into their personal account. Improper execution of a rollover—such as if the funds are temporarily made available in the individual’s personal account or are transferred to a vehicle that does not qualify as a “pension scheme” under the Spain–US DTT—lead to different outcomes. Specifically, the Spanish tax authorities could treat the transaction as a taxable event, subjecting the total distribution to Spanish personal income tax in the year of transfer. Under specific circumstances, certain tax relief provisions may apply.

Also, under the ruling, crossborder transfers (e.g., from a U.S. pension scheme to a Spanish pension scheme) are not eligible for this tax deferral, as they fall outside the scope of the Spain–US DTT. However, a similar regime exists for transfers between qualifying Spanish pension schemes. Historically, although this may contravene EU law, the Spanish tax authorities have applied strict limitations on extending Spanish tax incentives to overseas pension plans, even in cases where comparable situations exist.

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