Retiring to Spain on a Pakistani government pension? Spain cannot tax it, but it still counts, and Spanish nationality flips the rule

If you are a Pakistani national who retired from the civil service, the armed forces or a provincial government, and you are thinking of joining your children in Barcelona or Madrid, one article of a treaty decides more about your money than any Spanish tax table. Spain and Pakistan signed a double tax treaty in Madrid on 2 June 2010, and it has been in force since 18 May 2011. Under it, a pension that the Pakistani state pays you for government service can be taxed only in Pakistan, even after you become a Spanish tax resident. That is the good news. The rest of the story is less comfortable: Spain still counts that pension when it works out your rate, a pension from a private or state-owned employer is treated completely differently, and the day you take Spanish nationality, the rule turns around.

Who taxes a Pakistani government pension when you live in Spain?

Most of the treaty follows the usual pattern: you are taxed where you live, with exceptions. Article 19, on government service, is one of the exceptions. Its second paragraph says that pensions paid by a contracting state, or by one of its political subdivisions or local authorities, to an individual for services rendered to that state, subdivision or authority, are taxable only in that state. The wording covers pensions paid directly and pensions paid out of funds the government set up. For a Pakistani reader that means a federal pension, a pension from Punjab, Sindh or any other province, and a pension from a local authority, as long as it rewards service to that government.

The word "only" is what matters. It does not say Pakistan may tax first and Spain second. It gives the pension to Pakistan alone. So a retired Pakistani officer who moves to Spain and becomes tax resident there does not pay Spanish income tax on that pension, whatever Pakistan itself does with it. This is a real difference from the position of a private-sector retiree, and it is one of the reasons the treaty is worth reading before you decide where to spend your retirement.

Becoming tax resident is its own question. Spain treats you as resident if you spend more than 183 days in the country in a calendar year, or if your main economic interests are based there, and it presumes you are resident if your spouse and minor children live there, and the treaty's tie-breaker in article 4 then looks at where you have a permanent home and your centre of vital interests. We explain how the 183-day count catches people in our guide to Spain's 183-day rule. For the rest of this piece, assume you have crossed that line and Spain sees you as resident.

Why does an exempt pension still raise your Spanish tax bill?

Here is the part that surprises people. Article 22 of the treaty, which sets out how Spain removes double taxation, adds a sentence after the credit rules: where income of a Spanish resident is exempt in Spain under the treaty, Spain may still take that exempt income into account when calculating the tax on the rest of that person's income. Spanish tax advisers call this exemption with progression. Spain's Directorate General of Taxes describes such income as income that is not taxed itself but has to be considered when working out the rate that applies to the income that is.

In practice it works like this. Say you receive a Pakistani government pension and also have some Spanish income, perhaps rent from a flat, interest on savings, or part-time work. Spain cannot tax the pension. But Spanish income tax is progressive, and Spain calculates the average rate as if your income were the pension plus the Spanish income, then applies that higher average rate only to the Spanish part. If the pension is your only income, progression has nothing to bite on. If you have other income, the pension makes every euro of it more expensive.

Two consequences follow. First, the pension still has to be declared in your Spanish return, because Spain needs it to work out the rate, and leaving it out because "it is exempt" produces a return that is wrong. Second, the effect grows with the size of your other income. A pensioner with a modest Spanish rental income will barely notice it. A retired officer who also takes consultancy work in Spain may notice it a great deal.

What changes if you become a Spanish citizen?

Article 19 has a second half, and for Pakistanis planning to settle for good it may matter more than the first. The pension stays taxable only in Pakistan unless the pensioner is both resident in Spain and a Spanish national. If both are true, the same pension becomes taxable only in Spain. The rule flips completely: it goes from Spain being unable to tax it, to Spain being the only country that can.

That is not a distant possibility. Under article 22 of the Spanish Civil Code, nationality by residence requires ten years of legal, continuous residence immediately before the application. The two-year route applies to nationals of Ibero-American countries, Andorra, the Philippines, Equatorial Guinea and Portugal, and Pakistan is not on that list. Article 23 adds that the applicant must declare that they renounce their previous nationality, with exemptions only for the countries in that same short list and for Sephardic Jews of Spanish origin. So a Pakistani national who naturalises in Spain both renounces Pakistani nationality as far as Spain is concerned and, under the treaty, moves their government pension into the Spanish tax net.

None of this is a reason to avoid Spanish citizenship. A Spanish passport brings the right to live and work anywhere in the European Union, and for many families that outweighs the tax. But it should be a decision made with the numbers in front of you, not a surprise in the first tax return after the oath. If the pension is large, model the year you naturalise before you apply.

Which Pakistani pensions does Spain tax in full?

Not every pension that comes from Pakistan is a government pension in the treaty's sense. Article 18 deals with ordinary pensions: pensions and similar payments made to a resident of one country in respect of past employment are taxable only in that country. If you live in Spain and draw a pension from a private employer's scheme in Pakistan, Spain taxes it, and Pakistan gives it up.

The trap is the third paragraph of article 19. It says that salaries and pensions paid for services rendered in connection with a business carried on by a state, a province or a local authority are dealt with under the ordinary articles, article 18 for pensions. A pension earned at a commercial enterprise owned by the government is therefore usually treated like a private pension, even though the money ultimately comes from the state. Many Pakistani retirees assume that a pension from a state-owned bank, airline or utility counts as a government pension. Whether it does turns on whether the work was service to the government or work in a business the government runs, and that classification is the first thing to settle before you move.

Your contributions history is a separate issue again. Spain and Pakistan have no social security agreement, so years of contributions in Pakistan cannot be added to Spanish years to reach the fifteen years a Spanish retirement pension needs. We explain what that means in our guide to the Spanish pension and its two-year rule.

What about rent, savings and freelance fees from Pakistan?

For most other income the treaty lets both countries tax, and Spain then gives a credit. Rent from a house or a plot in Lahore or Karachi can be taxed in Pakistan under article 6, because that is where the property is. Interest on a Pakistani savings account or deposit can be taxed in Pakistan too, under article 11, but at no more than 10 per cent of the gross amount when the beneficial owner lives in Spain. Dividends from a Pakistani company are capped at 10 per cent for an individual shareholder under article 10.

Spain then taxes the same income as part of your worldwide income, and article 22 lets you deduct the Pakistani tax paid. The deduction cannot exceed the Spanish tax that corresponds to that income. If Pakistan took less than Spain would, you pay the difference in Spain. If Pakistan took more, the excess is not refunded by Spain.

One article in this treaty is unusual and matters to anyone who works remotely from Spain for Pakistani clients. Article 13 covers fees for technical services, defined as payments for technical, managerial or consultancy services, and lets the country the fee comes from tax it at up to 10 per cent of the gross amount. Many tax treaties have no such article. If a Pakistani company pays you for consultancy while you live in Spain, it may withhold tax in Pakistan, and the treaty caps that at 10 per cent only if you can show you are resident in Spain, which in practice means a certificate of tax residence for treaty purposes from the Spanish tax agency. Spain then taxes the fee and credits the Pakistani withholding, up to the limit above.

Do you have to declare Pakistani bank accounts in Spain?

Very likely, if you keep meaningful savings at home. Spanish tax residents must report accounts held with banks abroad on an information return known as Modelo 720. Article 42 bis of the Spanish tax management regulation says there is no obligation when the combined balances on 31 December do not exceed 50,000 euros and the combined average balances of the last quarter do not exceed 50,000 euros either. Cross either line and you must report all the accounts, not only the ones above the threshold. The duty is not limited to account holders: an authorised signatory, a beneficiary or anyone with power to dispose of the account reports it too, which catches many people who sign on a parent's account in Pakistan.

The return is filed between 1 January and 31 March of the year after the one it covers. In later years you only file again if a combined balance has grown by more than 20,000 euros since the last return, or if you stopped being a holder or authorised person on an account you had reported. Securities and property abroad are reported on the same form under their own categories. Nothing is taxed by Modelo 720 itself. It is an information return, but it tells the Spanish tax agency exactly what you hold in Pakistan, and the interest and rent from those assets then need to be in your income tax return as well.

For a retired family moving to Spain, the order matters: confirm which article your pension falls under, keep proof of the Pakistani tax paid on rent and interest, and file Modelo 720 by the end of March after your first year of residence.

Frequently asked questions

This article reflects the double tax treaty between Spain and Pakistan signed in Madrid on 2 June 2010 and in force since 18 May 2011, articles 22 and 23 of the Spanish Civil Code, and article 42 bis of the Spanish tax management regulation as they stood in October 2026. Pension classification is decided case by case, so speak to a Visagrad expert before you move or file.