American in Spain

Avoiding Double Taxation Between Spain and USA

June 25, 2008
Spain and USA Flag Merge

My tax situation is very unique. It will be less rare in 40 years, but I'm probably one of the first full-time transatlantic telecommuters. I'm an American citizen working for an American company, which pays me in US dollars into an American bank.......but I live in Spain.

Logically, it makes sense to pay taxes in the country in which you reside. I'm using the Spanish transportation system. I can get free medical care at the Spanish hospital. The Spanish police force is protecting me from criminals. The health of the Spanish economy is putting food in the grocery stores and therefore on my plate. I have a Spanish mortgage. I should be paying taxes in Spain.

That would all be true, I believe, if the other country involved was not the greedy superpower that is the United States of America. This post has background music. Click play below before continuing. Or don't. ytaudio(bQqtvl2Ibzo)

Luckily, there exists a Convenio de Doble Imposición Tributaria Firmado Entre Estados Unidos y España (Double Taxation Income Tax Treaty Between the United States and Spain).

This document can be found in Spanish here (only the first few pages are available for free), and the English version is here, brought to you by the ever helpful

The letter to the US President at the beginning of the English version of the treaty starts:

THE PRESIDENT. I have the honor to submit to you, with a view to its transmission to the Senate for advice and consent to ratification, the Convention between the United States of America and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, together with a related Protocol, signed at Madrid on February 22, 1990.

The letter is signed by Lawrence Eagleburger. Could you come up with a more American surname if you tried? I think not.

The treaty spends a lot of words talking about royalties and works of art, so I presume that it was originally intended for people like Penelope Cruz or Antonio Banderas that live in one country but perform in another.

The important part of the treaty that applies to me is Article 24.

ARTICLE 24: Relief from Double Taxation 1. In Spain, double taxation will be avoided, in accordance with the relevant provisions of the law of Spain, as follows: (a) Where a resident of Spain derives income which, in accordance with the provisions of this Convention, may be taxed in the United States, other than solely by reason of citizenship, Spain shall allow as a deduction from the tax on the income of that resident an amount equal to the income tax actually paid in the United States. Such deduction shall not, however, exceed that part of the income tax, as computed before the deduction is given, which is attributable to the income derived from the United States. (b) In the case of a dividend paid by a company which is a resident of the United States to a company which is a resident of Spain and which holds directly at least 25 percent of the capital of the company paying the dividend, in the computation of the credit there shall be taken into account, in addition to the tax creditable under subparagraph (a) of this paragraph, that part of the tax effectively paid by the first-mentioned company on the profits out of which the dividend is paid which relates such dividend, provided that such amount of tax is included, for this purpose, in the taxable base of the receiving company. Such deduction, together with the deduction allowable in respect of the dividend under subparagraph (a) of this paragraph, shall not exceed that part of the income tax, as computed before the deduction is given, which is attributable to the income subject to tax in the United States.

Believe it or not, it's not much clearer in Spanish. What this boils down to is:

  1. Pay your taxes in the United States as if you were living there. This value is X.
  2. Calculate how much tax you would pay in Spain if you had made that income in Spain. This value is Y.
  3. Calculate the difference (Y - X) and, if it is greater than zero, pay that to the Spanish government.

Simple, right? Well, no, actually. Because the first thing the US government asks you when you go to pay your taxes is, "Whoa!! Wait! You don't live in the US!? Before you can file your taxes, you need to tell us how much tax you paid to the country you're residing in!" Thank you, Joseph Heller, for giving us a term for this kind of bureaucratic nonsense. The system forces you to lie to one of the countries in order to break into the Catch-22 loop. After evaluating the situation carefully, I decided the that the easiest and smallest fib I could tell was that the taxes withheld from my paycheck was exactly equal to how much taxes I had paid in the US (X in the equation above). This is not strictly true, because sometimes they give you money back and sometimes they ask for more money when you actually file, but darn it, it's pretty close! So there, I have my X.

Now what about Y? If I made N dollars in 2007, how much Spanish tax would I pay if that had been in Spain? Well, first we have to change N into euros. So what exchange rate do you use? The one on December 31, 2007? Jan 1? July 1? The median? The mean? ARGH!!! Reasoning through this at the local tax office, we decided that the most fair way would be to convert every single paycheck to euros with the exchange rate on the day that the check was deposited, whether I transferred it to my Spanish bank at that time or not. In Spain, most people are paid at the end of every month, and often the amount varies depending on how many work days the month had. My salary, however, is fixed, but I get paid biweekly, so I had 26 paychecks in 2007. Luckily, I get paid on Fridays and Google Finance (god, that's a depressing chart!) keeps historical data from the close of markets on Fridays. So I went back and recorded the exchange rate on the date of every paycheck, entered the values into a spreadsheet and calculated the exact amount of euros that I earned in 2007 assuming that I had converted my entire salary to euros with no exchange commission fees as soon as I received the money. This, of course, resulted in the depressing realization that my biweekly paycheck, which was the same value in dollars for the entire year, was 300€ less in December 2007 than it was in January 2007. There are, indeed, some drawbacks to transatlantic telecommuting.

Once we had my year's salary converted to euros, the Spanish tax computer could quickly calculate how much tax I would have paid in Spain: Y. And you'll never believe what the difference came out to for me in 2007...

Y - X = 24€

After all was said and done, and all these complicated calculations took place, I had to pay the Spanish government 24 euros.

This rather surprised me, because I had always had the American prejudice that Europeans are taxed to death in order to pay for all the socialist policies like health care and actually giving retired people pensions that they can live on. It turns out that the tax rates in Spain and the US are more or less equal.