Americans in Spain: Taxes, investing and cutting through the confusion

Moving to a new country comes with many complexities, not least of which is navigating a new financial system.

For Americans living in Spain, dealing with the reality of being a foreign tax resident can seem daunting.

Understanding your financial opportunities and responsibilities is an important step to a successful life overseas.

Concerns, confusion, and some clarity

 “I’m hoping it’s not too painful, but worried about paying taxes twice,” says one Barcelona resident who recently relocated from California.

He’s not alone; in 2020, Stop Extraterritorial American Taxation (SEAT), an independent lobbying group, published a survey documenting the concerns of the 1,564 survey respondents — a collection of American expatriates throughout Europe.

While the survey was qualitative and didn’t apply a scientific methodology, SEAT’s Secretary, Karen Alpert believes it’s an important tool to augment the voices of Americans overseas.

The survey showcased confusion and frustration with primary concerns centering around taxation, investing, and opening a bank account.

Some Americans surveyed feared double taxation, such as a former Washington resident and small business owner who reported,

“Declaring what I earn is fine but paying taxes on internationally earned money with no intention of returning to the states to use it is wrong.”

Regarding investment fears, a former Florida resident wrote, “I have kept my IRA and Roth IRA funds in the USA because we are limited to a max $10,000 in any EU bank account. I don't like being told where I have to keep my money unless I want to incur additional tax fees.”  

SEAT President, and survey author, Laura Snyder hopes sharing these voices will help to change the system.

This insistence on change is evidenced by SEAT’s recent amicus curiae brief filed with the Supreme Court in relation to Charles G. Moore, et al. v. United States. 

The brief was filed in conjunction with the Association of American Residents Overseas (AARO), an organisation composed of international bankers, consultants, and lawyers.

READ ALSO: Where in Spain do all the Americans live in 2023?

The SEAT survey showcased Americans' confusion and frustration with primary concerns centering around taxation, investing, and opening a bank account. Photo: Jorge Fernández Salas/Unsplash

Which Americans pay taxes in Spain?

Any American living in Spain for six months or more (whether consecutively or not) must pay taxes on their worldwide income, the money they make in every country.

American citizens must also report their worldwide income to the U.S. Internal Revenue Service (IRS). The system is cumbersome because you’re essentially filing twice, but you shouldn’t worry about overpaying.

“In almost no scenario should people be worried about double taxation, they should merely be concerned that they’re living in Spain and they’ll pay a higher tax than living in the U.S.,” explains Louis Williams, Co-Founder and CEO of Entre Trámites. Americans in Spain are spared from double taxation thanks to a collection of tax treaties and agreements.

Understanding Tax Treaties and Agreements: The Basics

To avoid pitfalls like double taxation, the U.S. and Spain have a treaty, and various measures in place to maintain fair taxation.

Foreign tax credits are a deduction to your U.S. income tax. Essentially, what you pay in Spain, you don’t pay in the United States.

Foreign-earned income exclusions apply to income earned in Spain, totalling up to $120,000 in 2023. This income can come from various sources.

The Totalisation Agreement applies to Social Security and Medicare and ensures Americans are covered without paying double. If you’re an employee, your employer must submit a certificate of coverage to exempt you from taxation by the United States.  Generally, self-employed workers are covered by their country of residence, however, if you’re a U.S. citizen residing in Spain for 5 years or less, you remain under the U.S. system.

Beckham Law allows you to pay a flat rate of 24 percent on your earned worldwide income and is available to certain Spanish residents, including digital nomads, as well as Americans engaged in entrepreneurial activity, approved by ENISA, and connected to the entrepreneurial visa. Americans who work in Spain can apply Beckham’s law to their Spanish-earned income.

While Snyder acknowledges these agreements, she believes they’re insufficient to protect Americans from, “discrimination and the inability to live a normal life.” One area where Snyder believes these agreements fall short is investments and retirement funds.

Investing and retirement funds

There are a few things to consider regarding retirement funds and investing. As you’re now a Spanish resident, and no longer an American resident, there can be many complications with a pre-existing 401K, which is best dealt with on an individual basis.

As a resident of Spain, you’ll be able to invest in a Spanish retirement fund, which is capped at €8,000 annually for everyone. Investments beyond that cap are taxed based on your tax bracket, explains Maria Puy, a Barcelona-based lawyer who specializes in investments and immigration.

When SEAT's Snyder speaks about discrimination, she’s referring (in part) to U.S. taxation of foreign mutual funds, which, according to Snyder are prohibitively high, encouraging Americans to invest in the States, rather than overseas.

Foreign mutual funds are classified as passive foreign investments (PFICs). There are a myriad of U.S. tax regulations surrounding PFICs, most of which aim to prevent tax fraud. It can be complicated for Americans overseas when these same laws interfere with their retirement investments. Alpert explains that while retirement funds and PFICS are different, they could overlap if your retirement funds are invested in a foreign mutual fund.

According to Williams, PFICs only affect the very wealthy who use offshore and foreign mutual funds. He adds, “Most, let’s say normal Americans, don’t need to worry about getting trapped by these.” The laws could, however, become more complicated in countries that don’t have the same tax agreements with the United States as Spain does.

A rare case when Americans may be taxed twice involves the GILTI tax rule. "Under the GILTI tax rule for corporations, Spanish tax rates may not fully cover taxes owed, in which case the individual would need to pay the difference in taxes to the U.S. government, explains Vincenzo Villamena, an international tax CPA and CEO of Online Taxman. 

“This law exists to prevent corporations from evading taxes by moving their money to tax havens, such as the Canary Islands, and won’t affect most individuals moving to Spain”, explains Williams.

In brief, if you’re trying to make a large profit from high investments, you may want to avoid foreign mutual funds. You can also expect complications and limitations with workplace retirement funds if you continue to be employed by an American company.

READ ALSO: Why more and more Americans in Europe are renouncing their US citizenship

Opening a bank account in Spain

Yes, you can open a bank account in Spain, with or without Spanish residency.

Like the United States, different banks have different policies, but most require identification (such as a passport) and some proof of funds or employment.

Some banks do shy away from Americans to avoid additional oversight due to strong anti-corruption and anti-money laundering laws in place, but in Spain, most Americans won’t have a problem.

“I’ve been working with Americans for years and haven’t had any issues,” says Puy. The Americans I spoke with, who live in Barcelona, Ibiza, Madrid, and Valencia recommended banking with Sabadell and Caixa.  

READ ALSO:

• How to open a bank account in Spain if you're not a resident
• The Spanish bank accounts with no extra fees in 2023

Putting it all together

“American nationals shouldn’t be afraid, just remember to file, and understand that by living in Spain, you’ll pay higher taxes than you would back home,” says Williams.

He also recommends hiring a professional but cautions you shouldn’t pay more than €200 if you’re making under $120,000 annually.

Alpert adds that it’s good to choose an expert who knows both systems, the United States, and Spain.

The United States policy of taxing based on citizenship complicates finances and creates confusion, which is often augmented by the internet echo chamber, but with some basic knowledge and time, you’ll get the hang of it. 

READ ALSO: What's the difference between a gestor, a lawyer and a notary in Spain?