End of tax discrimination against foreign pensioners: deduction of health insurance and dependency expenses in Spanish personal income tax allowed

The Central Economic-Administrative Court has determined in an extraordinary appeal for the unification of criteria of 23 March 2021 (RG 5942/2020), the deductibility of compulsory health insurance (Krankenversicherung) and nursing care insurance (Pflegeversicherung), in the case of German pensions, as expenses deductible from personal income for work income tax purposes.

Citizens receiving a retirement pension from Germany who transfer their residence to Spain, exercising their right to freedom of movement, continue to pay compulsory and irrecoverable contributions to health insurance and long-term care insurance for the benefit of the German State. Those amounts are deducted directly from the retirement pension they receive.

Until now, the criteria of the Directorate-General for Taxation has been to deny the deductibility of those amounts as expenses for Spanish personal income tax purposes, with the result that taxpayers were taxed on their gross income and not on their net income, which constituted blatant discrimination against recipients of Spanish retirement pensions.

The recent ruling means that these contributions are treated as equal to the social security contributions for Spanish pensions, for the purposes of their deductibility for personal income tax purposes. Based on this ruling, all amounts that are deducted by the German State for health or dependency insurance and that are not recoverable, will be considered as a deductible expense for the calculation of the personal income tax that the pensioner must pay in Spain. It should be recalled that citizens resident for tax purposes in Spain are taxed in Spain on their worldwide income and assets, although the double taxation treaties provide for some exceptions (e.g. only pensions received by former public servants in Germany are taxed in Germany).

Taking into account that German pensions are considered as earned income in Spanish personal income tax, and after many years of refusal by the Spanish Tax Agency to recognise the deductibility of such amounts when calculating the personal income tax of foreign pensioners, those who, being tax residents in Spain, receive a retirement pension from Germany will be taxed on the "net" income as any taxpayer receiving a Spanish pension.

We consider that the ruling extends by analogy to those who receive retirement pensions not only from Germany, but also from any other State, insofar as the same assumptions of the ruling are met.

This ruling issued by the TEAC is binding on the entire Tax Administration, which opens up the possibility of requesting the rectification of self-assessments and refund of undue income for the excess income tax payments that have been made, in order to avoid the statute of limitations and, with it, the loss of this right. On 30 June 2021, the right to request a refund of personal income tax for 2016 will expire, as 4 years have passed since the deadline for filing the self-assessment using form 100.

Lozano Schindhelm has wide experience in this type of claims. We recommend tax residents in Spain who receive a retirement pension from Germany or another country and who have paid personal income tax without deducting compulsory health insurance and long-term care insurance contributions to request the rectification and refund of undue income as soon as possible.

Autor: Claudia Cascant
Autor: Andrea Quiles
Autor: Fernando Lozano