US Citizen in Spain — Navigate Your Dual IRS and AEAT Obligations

The Legal Framework: Spain-US Double Tax Treaty

The bilateral tax relationship is governed by the Convention between the Kingdom of Spain and the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income, signed in Madrid on 22 February 1990 and in force since 21 November 1990 (BOE-A-1990-27170).

The 1990 DTT broadly follows the OECD Model Convention but with important particulars: it applies the citizenship criterion (in addition to the residence criterion) to preserve the US right to tax its citizens worldwide, and contains specific clauses on pension plans (article 20) that recognise the deferral of qualified US vehicles.

Legal reference: BOE-A-1990-27170, ratified by Spain on 3 October 1990. There are no formal amending protocols, though diplomatic notes have been exchanged on specific articles.

The American Exception: Citizenship-Based Taxation

Unlike almost every other country in the world, the US taxes its citizens and permanent residents (green card holders) on their worldwide income regardless of where they live. This characteristic — citizenship-based taxation — is the defining element that makes the tax planning of a US citizen in Spain uniquely complex.

The 1990 DTT contains in article 1.4 a saving clause that expressly preserves the US right to tax its citizens as if the treaty did not exist for most of its provisions. This means that the exemptions and reductions available under the DTT to Spanish residents of other nationalities do not always apply to US citizens.

The Five Main Tax Obligations of a US Citizen in Spain

1. The US Tax Return (Form 1040)

Every US citizen and every green card holder must file the federal tax return (Form 1040) with the IRS each year, regardless of where they reside. The standard deadline is 15 April; residents abroad receive an automatic extension to 15 June and can request a further extension to 15 October.

The return must include all worldwide income: Spanish salaries, dividends from IBEX or S&P 500 shares, interest from Spanish or US bank accounts, rental income, capital gains and distributions from pension plans. The US taxes that global base but allows deduction of Spanish taxes paid through the Foreign Tax Credit.

2. FBAR: Foreign Bank Account Reporting

The FBAR (FinCEN Form 114, Report of Foreign Bank and Financial Accounts) requires any US Person to report to FinCEN (not to the IRS) all financial accounts abroad when the aggregate balance exceeds $10,000 at any point during the year. The obligation covers:

• Current and savings accounts at Spanish banks
• Securities and investment fund accounts in Spain
• Spanish occupational pension accounts
• Any other foreign financial account over which the taxpayer has signature authority

The filing deadline is 15 April (with automatic extension to 15 October). Penalties for non-compliance are substantial and can be confiscatory in cases of wilful violation.

3. Form 8938 (FATCA) and Foreign Financial Assets

The FATCA Act (Foreign Account Tax Compliance Act, 2010) requires US taxpayers with foreign financial assets above certain thresholds to report them on Form 8938 attached to the IRS return. Thresholds for residents abroad (such as those living in Spain) are higher: $200,000 at year-end or $300,000 at any point during the year.

Form 8938 covers a broader range than the FBAR: in addition to bank accounts, it includes interests in investment funds, cash-value insurance contracts, non-US private pension plans, and interests in foreign entities.

4. The Beckham Law and US Citizenship: A Complex Tension

The Beckham Law offers professionals relocating to Spain a flat 24% rate and exemption from foreign-source income for six years. For a US citizen, however, foreign-source income exempt in Spain is not exempt in the US: it continues to be taxed by the IRS under citizenship-based taxation.

The result is an asymmetry: Spanish tax is reduced (0% on foreign income under Beckham), but US tax on that same income has no Spanish tax credit available to deduct. This can generate a higher combined tax burden than expected.

For a US professional with primarily Spanish-source income and no significant foreign-source income, the Beckham Law can be highly efficient. For someone with material US-source income (dividends from US equities, distributions from a 401(k)), precise modelling is essential.

5. The Modelo 720 from a US Perspective

The Modelo 720 has a notable overlap with the FBAR and Form 8938 for US citizens resident in Spain: the same assets (US bank accounts, investment funds, brokerage accounts, real estate) must be declared to the AEAT (Modelo 720) and also to the IRS/FinCEN (FBAR, Form 8938).

This dual reporting does not mean double taxation, but it requires perfect coherence between both positions: the balance declared on the Modelo 720 must be consistent with what is declared on the FBAR and Form 8938. Any discrepancy can generate questions from the AEAT or the IRS.

Planning US Pension Plans in Spain

Optimisation Strategy: FTC vs FEIE

The two main mechanisms for reducing US tax for Spanish residents are:

Foreign Tax Credit (Form 1116): Deducts from the US tax return the tax actually paid in Spain. Most efficient for those with capital income (dividends, interest, gains), as it generates “passive basket” credits applicable against US capital income.

Foreign Earned Income Exclusion (Form 2555): Excludes from the IRS tax base up to $126,500 (2024) of foreign earned income. Most efficient for those with high employment income and limited capital income. Its limitation: those who use it cannot apply the FTC against excluded income.

Beckham Law implication: Under Beckham, the effective Spanish rate on Spanish-source income is 24%. If the US federal marginal rate is 22% or lower, the FTC generated in Spain may be insufficient or create excess credits (which have specific carryover rules). Coordinating both returns requires specialist advice.

Contact the BMC tax team for a consultation on your specific situation as a US citizen in Spain.