One of the most common misconceptions among U.S. expats living in Spain is that U.S. Social Security benefits are fully exempt from Spanish personal income tax (IRPF). This belief is usually based on Article 20[1] of the U.S.–Spain Tax Treaty, which grants the United States the right to tax these benefits. However, the actual tax treatment in Spain is more nuanced and does not always align with this simplified interpretation that is often repeated in expat forums and even by some advisors.

The Spanish Tax Authority (AEAT), through the Directorate-General for Taxation (DGT), has clarified in several binding rulings — most notably ruling V0249‑20 — that the fact the United States has taxing rights over Social Security benefits does not mean Spain must exempt them from taxation. In fact, the treaty does not establish exclusive taxation in the United States but rather allows for shared taxing rights. As a result, when the recipient is a tax resident in Spain, these benefits must be included in the Spanish Personal Income Tax (IRPF) return as employment income under Spanish domestic law.

The key issue lies in how double taxation is relieved. Contrary to what many taxpayers assume, Spain does not apply an automatic exemption in these cases. Instead, it applies to the foreign tax credit method. This means that the taxpayer must report U.S. Social Security benefits in Spain and, where applicable, may claim a credit for taxes actually paid in the United States. This approach, supported by administrative doctrine, highlights the importance of correctly interpreting the tax treaty and helps prevent common mistakes that could lead to tax assessments or penalties by the Spanish Tax Authority.

There is considerable practical confusion because some international advisory and consultancy sources (incorrect or simplified) treat Social Security with criteria based on the idea that the benefits of American Social Security are comparable to a public pension or in some cases to a private pension, which corresponds to Article 20 of the Convention that avoids double taxation.

The cases in which they equate it with a private pension are completely wrong within the framework of the Convention that avoids double taxation.

The key is that Social Security is addressed in Art 20 (1.b) differentiating it from private plans (like IRAs), but as a public benefit, and that completely changes the taxation.

Those who hold this position, international advisors and consultants, typically reason on these grounds by referring to Article 20 of the Spain-US Double Taxation Convention, which assigns taxing authority, recalling the worldwide taxation of residents in Spain (Article 2 of the Spanish Personal Income Tax Law), but limited by the same convention. The potential influence of the «saving clause» (allowing the US to continue taxing its citizens) must always be considered, and they maintain that a tax resident in Spain receiving US Social Security benefits is not subject to Spanish income tax (IRPF), since Spain cannot tax them directly because the Convention grants exclusive taxing authority[2] to the US, and in this case, the taxpayer must include them in their personal income tax return as exempt income, applying the «progressive exemption«. That is, even though they are exempt, they are taken into account when calculating the tax rate applicable to the rest of the income. In other words, for a tax resident in Spain, US Social Security benefits should not be subject to Spanish Personal Income Tax (IRPF), but they must be declared as exempt income with progressive taxation, since they interpret the Convention as attributing taxation exclusively to the US.

However, in the binding ruling V0249-20 from the Spanish Tax Agency (AEAT), paragraph 1.b addresses US Social Security benefits paid to an American citizen residing in another country, stating verbatim, «Social Security benefits paid by a Contracting State (USA) to a resident of the other Contracting State (Spain) or to a citizen of the United States may be taxed in the first-mentioned State.» This means that they «may be taxed,» which is different from «they are only taxed there.» It is a clause attributing taxing rights, not exclusivity. When the Convention says, «may be taxed in the USA,» it refers to the allocation of taxing rights. It means that the U.S. has the right to tax that income (taxing power), but it does not say that Spain cannot do so.

The Spain-U.S. Convention reaffirms the worldwide taxation of residents in Spain and the supremacy of the CDI (Convention to avoid the double taxation) in determining where they are taxed.

The binding ruling V0251 25 (05/03/2025) about US Pension Plans (IRAs / Profit-Sharing), confirms the application of Article 20 of the Spain-US Double Taxation Convention. It differences between private pensions (taxable in Spain) and public pensions (which may not be taxable in Spain) and it implicitly distinguishes the treatment of private pensions compared to public pensions (Social Security). It is a clause attributing taxing rights, not exclusivity.

When the Convention says, “may be taxable in the U.S.,” it means that the U.S. has the right to tax that income (taxing power). But it does not say that Spain cannot do so. The AEAT opts to interpret the difference between “may be taxed” vs. “shall be taxable only”. In the Conventions, there are these two types of wording:

• “May be taxed” which is a non-exclusive power: The mentioned State may tax, and the other State could also tax. A mechanism is required to avoid double taxation in this case with Social Security
• “Shall be taxable only” gives exclusive power, so, only one State may tax and the other must exempt.

Both are used in Art 20, the first one to refer to the social security benefits and the second one to the public pensions. The confusion arises because the text of the Convention does not explicitly say «exempt in Spain», it says «may be taxed» (not exclusive), but most advisors simplify it as «it is only taxed in the U.S.» which is completely incorrect!

In other words, to the question of whether these incomes (U.S. Social Security Benefits) have to be included in the IRPF if it is a resident in Spain, the answer is YES, a clear and unambiguous answer and YES, they must be included in the IRPF declaration.

The fact that some professional practitioners consider Social Security benefits to be taxed exclusively in the United States does not imply that this interpretation is in accordance with the Convention or Spanish administrative criteria. From a technical standpoint, the wording of Article 20 of the Double Taxation Convention does not grant exclusive taxing powers, which obliges Spain to apply the double taxation elimination mechanism provided for in Article 24. Consequently, the position defended by the Directorate General of Taxes—that these benefits are taxed in Spain with the right to deduct them—is more sound from both a legal and tax compliance perspective.

The real problem is the common confusion of conflating Social Security benefits with typical OECD public pensions (which are generally «taxable only») or with simplified interpretations of the treaty. However, under this Convention U.S./Spain, Social Security benefits do not have an exclusivity clause, and to avoid double taxation, a deduction is applied (Article 24 1.a[3]. and Article 80 of the Spanish Personal Income Tax Law). Therefore, the Spanish Directorate General of Taxes (DGT) implicitly rejects the exemption, and thus the technically correct position (and one supported by the DGT) is that Social Security benefits should be taxed under Spanish Personal Income Tax, with the right to a deduction for international double taxation.

The error stems from the simplification of trade for expats, the erroneous assimilation to OECD public pensions, and above all the historical inertia of some international firms, but it is clearly not supported by the text of the Convention.

At US Tax Consultants, we adhere strictly to the interpretative criteria established by the Spanish Tax Authority (AEAT) and the doctrine issued by the Directorate-General for Taxation. From a Spanish legal perspective, this administrative interpretation constitutes the only defensible position for ensuring full tax compliance, as it reflects how the law is applied in practice by the authorities. Consequently, our approach to the taxation of U.S. Social Security benefits is based on the correct application of the U.S.–Spain Tax Treaty as interpreted by the AEAT, prioritizing legal certainty and minimizing the risk of future assessments or penalties for our clients.

Totalization Agreement ≠ Tax Treaty

While discussing U.S. Social Security benefits, it is also important to distinguish the role of the U.S.–Spain Totalization Agreement. This agreement is often misunderstood, as it does not govern the taxation of Social Security benefits, but rather coordinates the Social Security systems of both countries for purposes such as contribution periods, eligibility, and benefit entitlement. In other words, it helps determine whether and how a taxpayer qualifies for benefits, but it has no impact on how those benefits are taxed. The tax treatment of U.S. Social Security income received by Spanish tax residents is determined exclusively by the U.S.–Spain Double Taxation Treaty and Spanish domestic tax law, as interpreted by the Spanish tax authorities.

FATCA and the exchange of financial data between Spain and the U.S.

It is also important to consider the impact of FATCA (Foreign Account Tax Compliance Act) and the automatic exchange of financial information between Spain and the United States. Under the bilateral agreement in force, Spanish financial institutions report information on accounts held by U.S. persons to the Spanish Tax Authority (AEAT), which is subsequently exchanged with the IRS. At the same time, U.S. authorities provide relevant financial data regarding Spanish tax residents. While this framework does not determine how Social Security benefits are taxed, it significantly increases transparency and the ability of tax authorities to detect discrepancies between U.S. and Spanish tax filings.

In this context, the assumption that U.S. Social Security benefits do not need to be reported in Spain can create material compliance risks. Given the level of information exchange currently in place, inconsistencies between declared income and data available to the tax authorities are more likely to be identified in tax audits or reviews. This reinforces the importance of following a technically sound and administratively aligned approach when reporting foreign income in Spain.

For more information, you can contact us US Tax Consultants. Do not hesitate to contact us by phone at +34 915 194 392, by email at info@ustaxconsultans.es , or through a free consultation, which can be booked via the “Book a free appointment” link on our website.

By Antonio Rodriguez

CEO, US Tax Consultants

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[1] Article 20. Pensions, Annuities, Alimony, and Child Support

1. Subject to the provisions of Article 21 (Government Service): (a) pensions and other similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment shall be taxable only in that State; and (b) social security benefits paid by a Contracting State (USA) to a resident of the other Contracting State (SPAIN) or a citizen of the United States may be taxed in the first-mentioned State.

[2] Nowhere in the Agreement is any mention of the “exclusive power”; it is a clause “attributing power, not exclusivity.”

[3] Article 24.1.a of the Spain-USA Double Taxation Convention: Spain will allow the deduction of tax paid in the USA, i.e., the imputation method (foreign tax credit).