The Superior Court of Justice of Madrid has exempted two retirees from having to pay 48,956.59 euros that the Treasury demanded from them for personal income tax on their retirement pensions which they received from abroad. The ruling explains that the pensions received from the World Tourism Organization (UNWTO) and the United Kingdom should not be taxed in Spain, since they are exempt from personal income tax as they are protected by international agreements that the Tax Agency cannot ignore.
It all starts when the Tax Agency (AEAT) reviewed the Income Tax return for these two retirees in 2018. After reviewing it, the Treasury claimed a debt of 48,956.59 euros from them, understanding that both pensions had to pay personal income tax in Spain as income from work, as stated in article 17 of Law 35/2006 on Personal Income Tax or Personal Income Tax (IRPF) (can be consulted in this Official State Gazette).
The pensioners Antonio and Socorro, dissatisfied with this decision, took the matter to the Regional Economic-Administrative Court (TEAR) of Madrid, but it rejected their claim. The reason for the administration’s “no” was that, for the TEAR, the OMT exemption only applied if the pension was collected entirely at once (in capital) and not as a monthly income. Regarding the British pension, the administrative court ruled that it had not been sufficiently proven that it was a public pension.
Despite the setback, the retirees decided to go to administrative litigation, alleging that their pensions were protected by international treaties. In the case of the UNWTO, the 2015 Headquarters Agreement between Spain and the organization exempts “salaries, emoluments and benefits” from taxes. Regarding the British pension, they explained that it was a public pension, since Luis Antonio was an official of the British Ministry of Commerce and Industry, and, therefore, the Double Taxation Convention establishes that he should only be taxed in the United Kingdom.
Pensions were exempt from personal income tax due to international agreements
Despite this decision, the retirees decided to go to the Superior Court of Justice of Madrid, which ruled in favor of the retirees and annulled the personal income tax settlement carried out by the Treasury. The Chamber rejected the restrictive interpretation of the TEAR on the OMT pension. It explains that Article 16.2 of the UNWTO Headquarters Convention exempts “salaries, emoluments and benefits” (can be consulted in this BOE), and the court confirms that the concept “benefits” clearly includes retirement pensions.
The court clarifies that the specific mention in the agreement of “capital benefits”, which uses the adverb “equally”, serves to complete and expand the scope of the exemption, but in no case to exclude pensions that are received in the form of income.
Regarding the retirement pension from the United Kingdom, the court explains that the retiree was a civil servant for two years in the British Ministry of Trade and Industry, a public body. Therefore, article 18.2 of the Double Taxation Convention must apply, which establishes that pensions paid by a State for services provided to that State “can only be taxed in that State”, that is, in the United Kingdom, since otherwise it would be taxed twice.
The Chamber also harshly criticizes the position of the Treasury, which intended that the retiree pay in Spain and then request a refund in the United Kingdom. The court rules that “the consequences of the alleged non-compliance cannot be placed on the taxpayer” or the interpretative discrepancies between the tax authorities of the two countries.
In this ruling, we must know that although the general rule is that pensions are taxed in personal income tax as income from work, this rule has exceptions. Article 5 of the Personal Income Tax Law itself establishes that Spanish law applies “without prejudice to the provisions of international treaties and conventions.” These treaties prevent the Treasury from subjecting these pensions to personal income tax in Spain, so the court annulled the liquidation and imposed the costs on the Administration.