The judgment also addressed an argument raised by the tax authority, which had suggested that the pensioners should have paid the tax in Spain. Photo credit: HannaMonica/Shutterstock

Spain’s High Court of Justice of Madrid has ruled in favour of two British pensioners resident in Spain, annulling a demand by the national tax authority that required them to pay €48,956.59 in personal income tax (IRPF). The court found that the pensions at issue were exempt from Spanish taxation under binding international agreements, rendering the assessment unlawful.

The case originated from a tax inspection carried out by the Agencia Tributaria in relation to the pensioners’ 2018 income tax return. Following its review, the authority determined that the income received should be treated as taxable employment income under Spanish law and issued a formal assessment seeking payment of the alleged underpaid tax.

The pensioners disputed the assessment, maintaining that Spain had no taxing rights over either source of income. One pension was paid by the World Tourism Organisation, an international body headquartered in Madrid, while the other originated from employment in the United Kingdom’s public sector. According to the pensioners, both payments were covered by international agreements that exempt them from Spanish income tax.

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Administrative proceedings

The dispute was first examined by the Regional Economic-Administrative Tribunal of Madrid, which rejected the pensioners’ arguments and upheld the tax authority’s position. The tribunal concluded that the exemption applicable to pensions paid by international organisations extended only to benefits paid in the form of a capital sum, rather than to periodic retirement payments. It also expressed doubts as to whether the British pension had been adequately proven to qualify as a public service pension under the relevant treaty.

Following the administrative ruling, the pensioners brought the matter before the High Court of Justice of Madrid, seeking judicial review of the assessment and the interpretation applied by the tax administration.

Treaty supremacy and domestic law

In its judgment, the High Court emphasised that Spain’s income tax legislation expressly recognises the primacy of international treaties duly ratified by the state. The judges noted that domestic tax provisions apply only insofar as they do not conflict with Spain’s international obligations, and that tax authorities are required to take those obligations into account when issuing assessments.

In relation to the pension paid by the World Tourism Organisation, the court examined the headquarters agreement signed between Spain and the organisation in 2015. That agreement exempts from Spanish taxation the salaries, emoluments and benefits paid by the organisation to its officials and former officials.

The court rejected the restrictive interpretation advanced by the tax authority and the administrative tribunal. It held that retirement pensions fall within the ordinary meaning of “benefits” as used in the agreement and that there is no legal basis for excluding pensions paid periodically from the scope of the exemption. The judges found that the form in which the pension is paid does not alter its protected status.

UK public sector pension

The court then considered the pension originating from the United Kingdom. In doing so, it applied the double taxation convention between Spain and the UK, which governs the allocation of taxing rights between the two countries.

Under that convention, pensions paid by a state in respect of services rendered in the exercise of public functions are taxable only in the paying state. The court concluded that the British pension met those conditions and therefore could not be taxed in Spain, notwithstanding the pensioners’ residence there for tax purposes.

As a result, the court held that Spain lacked jurisdiction to include either pension in the Spanish tax base for the year under review.

Rejection of the tax authority’s argument

The judgment also addressed an argument raised by the tax authority, which had suggested that the pensioners should have paid the tax in Spain and then sought relief or reimbursement in the United Kingdom if double taxation arose. The court dismissed this approach, stating that taxpayers cannot be required to correct errors made by tax administrations in the application of international treaties.

The judges held that it is the responsibility of the Spanish tax authority to apply treaty provisions correctly at the assessment stage and that failure to do so cannot be remedied by placing an additional procedural burden on taxpayers.

Outcome and broader relevance

The High Court annulled the tax assessment in its entirety and ordered the tax authority to bear the legal costs of the proceedings. While the ruling applies directly only to the case in question, it provides authoritative guidance on the taxation of pensions protected by international agreements.

Legal observers note that the judgment reinforces established principles concerning the supremacy of treaty law in Spain’s tax system and may be relevant to other foreign pensioners resident in Spain whose income derives from international organisations or foreign public service.