Moving to a new country often raises important tax questions, particularly regarding the taxation of retirement savings and pension benefits. In this article, we examine the tax treatment of the Swiss Three-Pillar Pension System when relocating from Switzerland to Spain.

General Information

The Swiss Three-Pillar System is the country's retirement pension scheme designed to provide financial security during retirement. It consists of the following three pillars:

1. First Pillar: State Pension.
2. Second Pillar: Occupational Pension.
3. Third Pillar: Private Pension Savings.

The First Pillar includes the Old-Age and Survivors' Insurance (AHV) and the Disability Insurance (IV). It provides basic financial security and is administered by the Swiss state. The Second Pillar is intended to help individuals maintain their standard of living after retirement and is financed through occupational pension schemes sponsored by employers. The Third Pillar consists of voluntary private retirement savings designed to supplement retirement income. Participation in the First and Second Pillars is mandatory.

Taxation of the Swiss Pension Pillars for Spanish Tax Residents

Income derived from any of the three Swiss pension pillars is taxable, like any other income, either in Switzerland or in Spain. The applicable tax treatment depends on the type of benefit received. Pension benefits may be paid either as periodic pension payments or as a lump-sum capital payment.

The taxation of pension income is governed by the Double Taxation Agreement (DTA) between Switzerland and Spain. As a general rule, taxing rights depend on the recipient's country of tax residence, regardless of nationality or the place from which the pension is paid (Article 18 of the DTA). Consequently, if you are tax resident in Spain, your Swiss pension is generally taxable in Spain. An important exception applies to pensions received by former Swiss civil servants. Such pensions remain taxable in Switzerland, even if the recipient resides in Spain (Article 19 of the DTA).

Where benefits are paid as a lump-sum capital distribution, these are likewise generally taxable in the country of residence, i.e. Spain. However, because the beneficiary is no longer resident in Switzerland, Switzerland levies a withholding tax to secure taxation of the payment. The amount of withholding tax depends on the canton in which the pension institution is established.

As a result, the same income may initially be subject to taxation in both countries. To eliminate this double taxation, the Double Taxation Agreement allows the Swiss withholding tax to be reclaimed upon application, provided that the pension benefits have been properly declared and taxed in Spain and appropriate proof of Spanish taxation is submitted.

Taxation of the First Pillar

Benefits from the First Pillar are always paid in the form of a pension. Under the Double Taxation Agreement (DTA), Switzerland does not levy withholding tax on pension payments if the recipient is tax resident in Spain. Consequently, income received from the First Pillar (the Swiss state pension) is paid without deduction and is not taxable in Switzerland. However, this income becomes fully taxable in Spain and must be declared in the annual Personal Income Tax Return (Modelo 100).

Taxation of the Second Pillar

Benefits from the Second Pillar may be paid either as periodic pension payments or as a lump-sum capital payment. For this reason, careful tax planning before drawing pension benefits is strongly recommended.

Where benefits are received as a pension, taxing rights generally belong to the country of residence, i.e. Spain (except for pensions paid to former public officials).

If the benefits are withdrawn as a lump-sum payment, beneficiaries may choose between a partial or a full withdrawal. Whether a partial or full withdrawal is more advantageous depends on the individual's circumstances and should be assessed on a case-by-case basis. In the case of capital payments, Switzerland levies withholding tax as described above. This withholding tax may subsequently be reclaimed upon application under the provisions of the Double Taxation Agreement.

Taxation of the Third Pillar

Benefits from the private pension scheme (Third Pillar) are always paid as a lump-sum capital distribution.

The funds are paid from the so-called Pillar 3a account (bank account) as a one-time capital payment. To minimise potential tax disadvantages, it is often advisable to open several Pillar 3a accounts, allowing withdrawals to be spread over different tax years instead of receiving the entire amount at once. This strategy should be planned individually in advance.

As with lump-sum payments from the Second Pillar, the right to tax these capital distributions generally belongs to the country of residence, i.e. Spain, subject to the withholding tax levied by Switzerland.

 

Withdrawal of the Over-Mandatory Pension Benefits – Tax-Free in Spain?

When receiving benefits from the Swiss pension system, it is important to distinguish between the mandatory portion (BVG/LPP minimum benefits) and the over-mandatory portion. This distinction is relevant not only for calculating pension benefits but also for determining their tax treatment in Spain.

The mandatory portion consists of the minimum statutory contributions paid into the occupational pension scheme (Second Pillar).

The over-mandatory portion consists of additional contributions exceeding the statutory minimum requirements. These contributions are generally more flexible and may be made voluntarily by both employers and employees. Lump-sum withdrawals of the over-mandatory portion are generally possible from the age of 60, unless an earlier withdrawal is permitted under one of the legally recognised exceptions.

A particularly important aspect for Swiss nationals relocating to Spain is the possibility of converting this over-mandatory portion into a lifetime annuity (Renta Vitalicia). Under Spanish tax legislation, lifetime annuities may benefit from favourable tax treatment provided certain legal requirements are met. This may be an attractive alternative for the over-mandatory portion, as a direct lump-sum withdrawal could otherwise be taxed as investment income. To qualify, the annuity must be paid through an insurance product that complies with the legal requirements applicable to a Spanish Renta Vitalicia. Before making any decision, it is advisable to confirm with the Swiss pension fund whether the funds can be transferred directly abroad or whether an initial lump-sum withdrawal is required. If a lump-sum payment is made first, it will generally be subject to taxation as a capital distribution.

Important Notes on Swiss Pension Benefits in Spain

Please note that the Spanish tax treatment of benefits received from the Swiss pension system (particularly the Second Pillar and Pillar 3a) is not determined solely by the legal classification or payment method under Swiss law. The decisive factor is whether, and to what extent, the contributions made during the accumulation phase benefited from tax relief.

In practical terms, the fact that a payment is formally classified as a lump-sum capital withdrawal in Switzerland does not automatically mean that Spain will treat it as capital income. The Spanish Tax Agency applies its own independent tax qualification, taking into account the origin of the contributions and whether they were tax-advantaged. Where contributions benefited from tax relief, the resulting payment may instead be classified as employment or pension income, leading to a different tax treatment.

For this reason, it is essential to retain documentation proving the tax treatment of the contributions made in Switzerland (for example, evidence that the contributions were tax-deductible) in order to support the correct tax classification before the Spanish Tax Authorities.

Our law firm will be pleased to analyse your individual situation, carry out the necessary administrative procedures on your behalf and prepare and file the corresponding Spanish tax returns. Should you require personalised advice or have any questions regarding the taxation of Swiss pensions in Spain, please do not hesitate to contact us by email or telephone.

Author:

Rike Füllgraf
Tax Advisor
info@sspartners.es
Tel: (+34) 951 12 13 06
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