Spain: A tax-free retirement option for former officials of many international organizations

Income tax status of pensions from international organizations in Spain

Summary:

The Madrid Supreme Court (Tribunal Superior de Justicia, TSJ) reaffirmed in case EDJ 2020/668781 STSJ Madrid (Contencioso) of 22 July 2020 that UN, NATO and OECD pensions are exempted from income tax in Spain.

These pensions are considered as deferred salary, and fall under the term “emoluments” in the 1946 and 1947 UN Conventions on Privileges and Immunities, the 1951 NATO Convention, and the OECD Convention. Under Spanish tax and labour law, there can be no distinction between wages, salaries, allowances, pensions, and other benefits received from personal exertion.

Accordingly, as UN/NATO/OECD salaries are exempted from income tax, so are all other benefits and payments, including pensions and payments to descendants by the Pension Funds established by these international organizations to which Spain is a party.

1. The tax status in Spain is attractive to UN retirees. There is no specific national legislation that outlines the tax-free status of UN pensions. However, there is extensive jurisprudence which has settled without ambiguity that UN pensions are not subject to income tax in Spain.

2. The exemption is enshrined in a number of decisions of the relevant courts, including the Tribunal Superior de Justicia in several Regional “Autonomias” which deems UN pensions as ‘deferred salary’ on which tax was already paid in the course of employment with the UN entities, and which is tax exempted under the 1946 Convention on the Privileges and Immunities of the United Nations and the 1947 Convention in respect of UN Agencies, Funds and Programmes. Additionally, retirees from other international organizations which have similar Privileges and Immunities provisions in their Conventions and to which Spain is a party (i.e.NATO, OECD, etc) also enjoy similar privileged tax status.

3. In fact, the exemption is absolute, and retirees are not required to declare UN pensions as income in their annual tax return to Spanish tax authorities. The Court has pronounced itself on numerous occasions, as cited in appeals (2003) 736/2000; (2003) 737/2000; (2007) 1227/2003; and (2008) 762/2005. The Court again pronounced itself most recently in the Tribunal Superior de Justicia (TSJ), Madrid Contencioso, sec 5, S 22-07-2020 number 523/2020. Rec 909/2019, handed down on 21 July 2020. In this instance the TSJ heard appeals from three resolutions of “Tribunal Economico Administrative Regional de Madrid” (TEAR) of 25 March 2019 in respect to three income tax returns from 2104, 2015, and 2016.

4. In this case, the facts related to a former staff member of the North Atlantic Treaty Organization (NATO) and in respect of his tax returns for 2014, 2015 and 2016. The taxpayer argued that his NATO pension benefits were exempt from Spanish income tax (IRPF) by virtue of article XIX of the 1951 NATO Treaty, ratified by Spain in 1987 and which provides that the officials of NATO referred to in article XVII shall enjoy tax exemptions in respect of salaries and other emoluments that they receive as officials of the organization. The taxpayer argued that the term “other emoluments” must be interpreted as meaning any type of retribution received on account of his status an official, whether in active service or retired.

​The taxpayer did not share the TEAR criteria that the official lost his status as official upon retirement. He further argued that the TEAR made no reference to the concept of “deferred salary” issued in a number of judicial decisions in respect of pensions received by international officials following the officials contributions to the funds that pays them, and as oft-recognized by the TJS, in the sense that these retirement pensions are simply an element of the salary received by the official for his labor, the payment of which is deferred a later point in time; and that this does not alter the character of the salary, and from that that it must follow the same fiscal treatment as the salary itself.

​It further argued that the Supreme Court recognized this argument in a number of sentences, including appeal 246/2017 of January 2017, and in the same sense even the TEAR in Andalucia in claims NUM003 and NUM004. It further indicated that Hacienda (Tax Department) had itself agreed to exempt NATO colleagues of the applicant in this matter.

5. In its defence, the administration outlined that it was not arguing the status of the exemptions in respect of serving NATO officials, but that such status should not extend to retired officials. It argued that the term “other emoluments” should have a restrictive interpretation and to mean benefits other than salary received by serving officials only, and that the exemptions lose their character upon the retirement of the officials. It further argued that the concept of deferred salary was not applicable since it was not accredited that the officials and the organizations contributions to the pension fund could be considered to reward the official for his official functions and that article 105 of the LGT should be the applicable norm.

6. In its judgement, the TJS outlined that the question under consideration was whether the tax exemption provided in article XIX of the 1951 NATO Convention, as ratified by Spain in 1987 (BOE 10 September 1987), when Spain acceded to NATO in respect of salaries of officials of the Organization is also applicable to the retirement pension received by those officials. It stated that it provided that “officials of the Organization (NATO) referred to in article XVII enjoy tax exemption in respect of salaries and other emoluments that they receive by virtue as officials of the organization …”.

​7. The judgement goes on to outline that the Court has already pronounced itself in this same respect in appeal 977/2015 of April 2017 related to a former official of the WHO, which also made reference to other sentences of the TJS numbers 688/2014 of 24 June 2016; 736/2000 of 12 March 2003; 737/2000 of 24 October 2003; 1277/2003 of 21 June 2007; and 762/2005 of 25 June 2008.

8. Appeal 977/2015 in respect of the WHO retiree stated the matter to relate to the payments received as pension and widow payments by the appellant from the UNJSPF. The Supreme Court analysed the provisions of section 18.b of the 1946 Convention on the Privileges and Immunities of the United Nations, and section. 19.b of the 1947 Convention on the Privileges and Immunities of the UN Agencies, Funds and Programmes, which included the WHO.

Both sections provide that UN officials shall enjoy tax exemption on salaries and emoluments paid by the Organization. Both UN Conventions and the NATO conventions contained virtually identical provisions in respect of the term ‘emoluments’. Therefore, the heart of the question was whether the UN pensions were included or not in the term ‘emoluments’. It then made reference to the aforementioned earlier rulings 688/2014, 736 and 737/2000, 1277/2003, and 762/2005 which had already pronounced themselves in this same respect.

9. Judgement 736/2000 of 12 March 2003 – in relation to an OECD retired official - stated that the IPRF Law 18/1991 (income tax law) regulated the fiscal provisions of services for labour, including wages and salaries, allowances, pensions, and other benefits for which it must be concluded that there can be no different treatment to salaries, allowances, pensions and other benefits unless a specific law so provides, which was not the case in that instance, and taking into account that the salaries of the OECD are exempted from income tax, that exemption must be extended to pensions … and that the exemption is contemplated as proper under article 23.3 of the LGT (General Taxation Law) which finds that pensions fall under the expression “emoluments”.

10. In respect of the WHO official, the TSJ went on to outline that article 17 of IPRF (Income tax law) 35/2006current between 2008 and 2011, and which also made no distinction between returns from personal labor be they salaries, wages, pensions, allowances and other benefits, and for which there was no reason to exclude pensions from the term “emoluments”, and ordered appropriate refunds of tax imposed between 2008 and 2011 together with applicable interest.

11. Returning to the NATO case, the TSJ found for the appellant and ordered the Tax Administrator to refund income tax imposed for 2014, 2015, and 2016, plus due interest, and awarded legal costs in the cause, and the maximum legal expenses of 2,000 euros provided by the legislation to the appellant against the Tax Administrator.

Disclaimer

This opinion reflects solely the views of Manuel Calzada and do not necessarily those of the United Nations. The 2Gedar Foundations handles NLV visas for those interested in Spanish fiscal residency. Contact the author for further details and referrals.