An American couple, both 68, have been Spanish tax residents for four years on a non-lucrative visa. They are selling a holiday apartment on the coast — not their home, just an asset they have held a long time — and the gain is substantial. Their Spanish asesor tells them something that sounds too good to be true, and isn't: because they are over 65, if they put the proceeds into an insured life annuity within six months, the gain is exempt. Up to €240,000 of reinvestment. No Spanish tax at all.
This is real. It is article 38.3 of the Spanish income tax law, it is exactly as generous as it sounds, and Spanish retirees use it constantly. The asesor has given correct advice.
The problem is that the advice was priced for a taxpayer with one tax authority. This couple has two, and only one of them is offering a discount. What follows is not a loophole, an aggressive reading, or a trap laid by anyone. It is what happens when a relief designed by one country meets a tax system that measures the person rather than the place.
On this page
The gift: what article 38.3 actually gives you Half an exemption: America has no article 38.3 The relief does not remove the tax. It changes the payee The purchase itself is a US taxable event The paragraph that asks whose life it is Two countries, two forms, one number The treaty exemption exists — and it belongs to your insurer Then it pays out, in two different fractions, forever When article 38.3 is still the right answer Frequently asked questions
"Spanish reliefs are written for Spanish taxpayers, and there is nothing wrong with that. But when an American takes one, the question is never only 'does this work?'. It is 'who ends up with the money if it does?' Those are different questions, and the second one is the one nobody asks in the six months you have to decide."
— Lola Jurado · Immigration lawyer, Ilustre Colegio de Abogados de Málaga (nº 10907)
The gift: what article 38.3 actually gives you
Article 38.3 of Ley 35/2006 (the IRPF law) excludes from taxation the capital gain arising on the transfer of any asset by a taxpayer over 65, provided the total amount obtained is used, within six months, to constitute an insured life annuity (renta vitalicia asegurada) in the taxpayer's favour.
The word "any" is what makes it powerful. This is not the separate over-65 relief for selling your main home under article 33.4.b — that one is confined to your vivienda habitual, and we explain elsewhere why it so rarely rescues a US house you have just left. If the home being sold is instead your Spanish habitual residence, read the separate note on article 33.4.b and the US Section 121 cap. Article 38.3 reaches a second property, a portfolio, a stake in a business, a plot of land. Anything.
The conditions are precise, and AEAT applies them precisely:
- The ceiling is €240,000, and it is a lifetime limit per taxpayer, not per operation. Spend it once and it is gone.
- If you reinvest less than the total amount obtained, only the proportional part of the gain corresponding to the amount reinvested is exempt.
- The annuity must have a periodicity of one year or less, must begin paying within one year of being constituted, and the annual amount may not decrease by more than 5% against the previous year.
- You must tell the insurer, expressly, that the annuity being contracted is the reinvestment of proceeds from a transfer, for the purposes of this exemption. This is not a formality you can add later.
Half an exemption: America has no article 38.3
There is no provision of the Internal Revenue Code that says: if you are over 65 and you buy an annuity with the proceeds, the gain is not recognised. There is no rollover, no deferral, no election. Buying an annuity with the proceeds of a sale is, for US purposes, simply two unrelated things: a sale, which is taxable, and a purchase, which is not deductible.
So on the American side of the couple's file, the sale of the apartment produces a fully recognised capital gain in the year of sale. The €240,000 that went into the annuity is invisible to it. The six-month deadline they spent so much energy meeting has no US consequence at all.
And because the property is Spanish, the whole of the Spanish capital gains computation comes across the Atlantic to be redone: basis translated at the historic rate, proceeds at the current one, which is its own separate currency problem. That much is true of any Spanish sale by an American, exemption or no exemption.
The relief does not remove the tax. It changes the payee
Here is the part that is genuinely counter-intuitive, and it is the reason this page exists.
Run the couple's file without the exemption. They sell, Spain taxes the gain on the savings-income scale, they pay Spanish tax. Then they file in the United States, report the same gain, and claim the Spanish tax as a foreign tax credit — the mechanism the treaty itself contemplates in Article 24 for relieving double taxation. The Spanish tax absorbs some or all of the US tax. They pay, broadly, the higher of the two rates once.
Now run it with the exemption. Spain charges nothing. They file in the United States, report the same gain — and have no Spanish tax to credit, because they did not pay any. The US tax stands alone, uncushioned, at full height.
The Spanish tax they avoided was, in substantial part, tax they were never economically bearing twice in the first place. It was tax that was being credited. Removing it does not put money in their pocket; it removes the shield in front of the US charge. The relief has not made the tax smaller. It has changed which government receives it — and in exchange, €240,000 of their capital is now locked inside an insurance contract with a 5%-decrease rule attached to it for the rest of their lives.
We are stating the structure, not your number. Whether the offset really is close to one-for-one in your case turns on how the gain is sourced for US purposes, on your foreign tax credit limitation, on the rest of your income that year, and on which basket the credit falls into. Those are questions for a US tax adviser with your actual figures, and they need answering before the six-month clock starts, not after the annuity is signed. That is the whole point: this is a decision with a deadline, and the deadline runs on the Spanish calendar while the consequences run on the American one.
The purchase itself is a US taxable event
Most people, told the above, conclude that article 38.3 is merely neutral for an American — a wash. It is not quite neutral, because the act of buying the annuity has its own US cost, and almost nobody sees it coming.
Section 4371(2) of the Internal Revenue Code imposes "1 cent on each dollar, or fractional part thereof, of the premium paid on the policy of life, sickness, or accident insurance, or annuity contract" — where the contract is issued by a foreign insurer. One per cent of the premium. On a €240,000 premium, that is a four-figure sum in dollars, payable to the United States, for the act of complying with a Spanish tax rule.
And it is not somebody else's tax. Section 4374 provides that the tax "shall be paid, on the basis of a return, by any person who makes, signs, issues, or sells any of the documents and instruments subject to the tax, or for whose use or benefit the same are made, signed, issued, or sold." An annuity constituted in your favour is made for your benefit. Regulation 46.4374-1 fixes the moment: liability attaches when the premium payment is transferred to the foreign insurer. The signature you gave to satisfy AEAT is the same signature that starts this clock.
The paragraph that asks whose life it is
The natural objection is immediate: I live in Spain. The insurer is Spanish. The money is in euros. The contract is governed by Spanish law and sold in a branch in Málaga. What conceivable connection does this have to the United States?
The answer is in the structure of one regulation, and it repays reading the two paragraphs side by side.
For casualty insurance, Regulation 46.4371-2(a)(2) requires the policy to be issued "to or for, or in the name of, a domestic corporation, domestic partnership, or an individual resident of the United States, against or with respect to hazards, risks, losses, or liabilities wholly or partly within the United States." Two nexus tests: a US person, and a US risk. Our couple would fail both.
For life insurance and annuity contracts, Regulation 46.4371-2(b)(2) says only that the contract must be issued "to any person with respect to the life or hazards to the person of a citizen or resident of the United States."
Read it again and notice what is not there. No residence requirement. No US-situs requirement. No reference to where the risk sits, where the contract is signed, what currency it is in, or which country's regulator supervises it. The casualty paragraph asks where the risk is. The life-and-annuity paragraph asks whose life it is.
This is the same principle that runs underneath most of the surprises on this site: the United States taxes the person, not the place. Here it simply appears in an unusually pure form, in a corner of the Code nobody warns retirees about.
Two countries, two forms, one number
The section 4371 tax is reported on Form 720 — the Quarterly Federal Excise Tax Return.
Our clients already know a 720. It is the Modelo 720, Spain's declaration of assets held abroad, and it is one of the first things any American moving to Spain is told about. It is an information return. It reports assets. It has nothing whatsoever to do with insurance, excise taxes, or the United States.
| Modelo 720 (Spain) | Form 720 (United States) | |
|---|---|---|
| What it is | Information return on assets held outside Spain | Quarterly Federal Excise Tax Return |
| Filed with | AEAT | IRS |
| Why you would file it | You are a Spanish resident with foreign assets over the thresholds | You owe an excise tax — here, on a premium paid to a foreign insurer |
| Frequency | Annual | Quarterly |
| Relationship between the two | None. They share three digits and nothing else. | |
We flag this because we have watched the confusion happen in the room. A retiree who is told "there may be a 720 here" will hear the Spanish form they already know, nod, and file nothing. The number is a coincidence, and it is a coincidence positioned exactly where it will do the most damage.
The treaty exemption exists — and it belongs to your insurer
At this point a well-advised reader reaches for the treaty, and they are right to. The excise tax is covered. Article 2(1)(b) of the 1990 Convention says the Convention applies, in the United States, to "the Federal income taxes imposed by the Internal Revenue Code (but excluding social security contributions), and the excise taxes imposed on insurance premiums paid to foreign insurers and with respect to private foundations" — adding that it applies to those excise taxes "only to the extent that the risks covered by such premiums are not reinsured with a person not entitled to exemption from such taxes under this or any other Convention which applies to these taxes."
So the relief is there. But being covered by a treaty is not the same as being exempt in your hands, and the gap between those two things is where this section lives.
Revenue Procedure 2003-78 (as amended by Rev. Proc. 2015-46) sets the mechanics. Section 3.01 provides that a person otherwise required to remit the insurance excise tax may consider the premiums exempt under an income tax treaty only if the premiums are paid to an insurer that is a treaty resident and, prior to filing the return for the taxable period, that person has knowledge that there was in effect for that period a closing agreement between the IRS and the foreign insurer under that revenue procedure or its predecessors.
Read that carefully. The exemption does not turn on the treaty alone. It turns on a private agreement between the IRS and your insurance company — a document you did not negotiate, cannot obtain, and are nonetheless required to know about before you file.
The IRS publishes a list of the companies that have entered into these agreements. We reviewed it in July 2026. For the whole of Spain, it showed five entries:
| Company (as listed) | Address | Effective date |
|---|---|---|
| Generali España S.A. de Seguros y Reaseguros | Madrid | 17 July 2023 |
| Mapfre España Compañía de Seguros y Reaseguros, S.A. | Majadahonda, Madrid | 19 March 2019 |
| Mapfre Global Risks, Compañía Internacional de Seguros y Reaseguros, S.A. | Majadahonda, Madrid | 8 July 2009 |
| Mapfre Re Compañía de Reaseguros, S.A. | Madrid | 24 September 2004 |
| Aseguradores de Riesgos Nucleares A.I.E. * | Madrid | 1 January 1996 |
Five, for a country of forty-eight million people. Three of them are Mapfre entities, two of those describing themselves in their own registered names as reinsurance and international global-risk vehicles. One is a nuclear risk pool — and it is the one carrying the asterisk, which in the IRS's own legend on that page means the company "has not timely recertified its entitlement to treaty benefits in accordance with the terms of its closing agreement."
What is not on the list is the point. The names a retiree in Málaga is actually shown when they walk into their bank and ask about a renta vitalicia — the large Spanish life and savings companies that dominate that market — do not appear.
Then it pays out, in two different fractions, forever
Suppose all of the above is navigated and the annuity is in place. It now begins to pay, and the two systems disagree about what is arriving — not for one year, but for the rest of the annuitant's life.
Spain taxes an immediate life annuity under article 25.3 LIRPF on a fixed percentage of each payment, set by the annuitant's age when the annuity is constituted and then frozen for the life of the contract: 24% of each payment for someone aged 60 to 65, 20% at 66 to 69, and 8% once over 70. This is generous, and it is a genuine reason to like these products. We set out the full age table on our note on how Spain taxes annuities.
The United States taxes it under section 72, using an exclusion ratio: the investment in the contract over the expected return, applied to each payment. A completely different fraction, computed on a completely different theory, of the same euro.
Two countries, one payment, two unrelated inclusion percentages, every year, for twenty or thirty years. Whether the credit mechanism reconciles them cleanly in any given year is not a question with a general answer — it is arithmetic, done annually, on your figures. What we can tell you is that a product that looked simple at the moment of purchase has become a permanent two-jurisdiction computation, and that it was bought to solve a one-year problem.
There is a related question we deliberately do not answer here, because it needs your facts and a US adviser: how the contract is reported — whether it lands on Form 8938 or an FBAR — turns on its terms, including whether it has any surrender value. Our note on FATCA and US persons banking in Spain sets out the general framework; the specific answer for an annuity belongs with the person who signs your return.
When article 38.3 is still the right answer
We do not think the conclusion is "Americans should never use article 38.3", and we would be doing you a disservice if we let the tone of this page imply it.
A life annuity in euros can be an excellent thing for a retiree in Spain to own, entirely on its own merits. It converts a pile of capital into an income floor that cannot be outlived, denominated in the currency you actually spend — which is a real answer to a real problem we write about constantly, the USD/EUR exposure that sits underneath every American retirement in Spain. The Spanish payout treatment is genuinely favourable. And an income floor removes a category of worry that no spreadsheet fully captures.
The distinction we are drawing is narrower than "good product / bad product", and it is this:
The questions worth putting on the table, in this order, and early:
- What does the credit position actually look like? Model the sale both ways — with the exemption and without it — with your US adviser, on your real numbers. If the answer is that the exemption transfers roughly the same money to a different treasury, you have learned the most important thing about this decision, and you have learned it in month one rather than month seven.
- Who is the insurer, and does it hold a closing agreement? This is the one question in this entire page that has a clean yes/no answer, and the identity of the insurer is the single variable that moves both tax systems at once. Ask it in writing. Ask it before you choose the company, not after.
- Does the annuity have to be Spanish at all? Section 4371 turns on the insurer being foreign — that is the hook, and it is a fact about the counterparty rather than about you. Whether AEAT would accept an annuity constituted with an insurer established elsewhere, and on what conditions, is a question for a Spanish asesor fiscal and turns on current AEAT and DGT criteria. We flag it as a question, not as a plan, because getting it wrong loses the Spanish exemption entirely and there is no second €240,000.
- Is the sale in the right year in the first place? The exemption is a six-month decision bolted onto a sale that has already happened. Almost everything on this site about American retirees comes back to the same lesson: the year in which you become a Spanish tax resident does more work than any relief you can claim afterwards. If the apartment has not been sold yet, that is the conversation to have — not this one.
We are your immigration lawyers, not your US tax preparer, and the filing position on any of this belongs to a US adviser who signs the return. What we can do is make sure the Spanish relief is not treated as free money simply because a Spanish adviser correctly described a Spanish rule.
Frequently asked questions
Does the Spanish over-65 annuity exemption save an American any tax?
Often it saves less than it appears to, and sometimes nothing at all. Article 38.3 removes the Spanish tax on the gain. It does not touch the US tax, because the United States has no equivalent reinvestment relief and the purchase of an annuity is not a non-recognition event. Worse, the Spanish tax you no longer pay is the Spanish tax you would otherwise have credited against the US charge. Taking the exemption can therefore change which treasury receives the money rather than reduce the total. Whether that is true in your case depends on the sourcing of the gain, your foreign tax credit limitation and your other income, and it must be modelled by your US tax adviser before the six-month clock starts.
Is there really a US tax on buying a Spanish annuity?
Section 4371(2) imposes one cent on each dollar, or fractional part, of the premium paid on an annuity contract issued by a foreign insurer. Regulation 46.4371-2(b) sets the scope: the contract must be issued by a foreign corporation as insurer, and issued to any person with respect to the life or hazards to the person of a citizen or resident of the United States. On a 240,000 euro premium that is roughly 1% of the premium. Section 4374 makes the tax payable by any person who makes, signs, issues or sells the instrument, or for whose use or benefit it is made — which reaches the retiree — and Regulation 46.4374-1 attaches liability when the premium is transferred to the foreign insurer.
I live in Spain and I am not a US resident. Does the excise tax still reach me?
Read the two paragraphs of the regulation side by side. For casualty insurance, Regulation 46.4371-2(a)(2) requires an insured who is an individual resident of the United States and risks wholly or partly within the United States. For life insurance and annuity contracts, Regulation 46.4371-2(b)(2) says only: to any person with respect to the life or hazards to the person of a citizen or resident of the United States. There is no residence requirement and no US-situs requirement in that paragraph. The casualty rule asks where the risk is. The annuity rule asks whose life it is.
Does the US-Spain treaty exempt the excise tax?
The Convention covers it. Article 2(1)(b) of the 1990 Convention applies to the US federal income taxes and to the excise taxes imposed on insurance premiums paid to foreign insurers, but only to the extent that the risks covered are not reinsured with a person not entitled to exemption under this or another applicable Convention. Being covered is not the same as being exempt in your hands. Revenue Procedure 2003-78 provides that a person otherwise required to remit the tax may treat the premium as exempt only if the insurer is a treaty resident and, before filing the return for the period, that person has knowledge that a closing agreement between the IRS and that insurer was in effect for that period.
How do I know whether my Spanish insurer has a closing agreement?
You ask the insurer. The IRS publishes a list of foreign insurers and reinsurers with closing agreements, but it warns that the published lists cannot be relied upon as conclusive that a particular company has a valid closing agreement in effect, and directs interested parties to contact the company directly. Reviewed in July 2026, that list showed only five Spanish addresses: Generali España, three Mapfre entities, and a nuclear risk pool carrying the IRS's own asterisk for not having timely recertified its entitlement to treaty benefits. The absence of a company from the list is not proof that it has no agreement — but the burden of finding out, before you file, sits with you.
Is this the same 720 I already file in Spain?
No, and the collision is genuinely dangerous. Spain's Modelo 720 is an information return about assets held abroad. The US Form 720 is the Quarterly Federal Excise Tax Return, and it is the form on which the section 4371 tax is reported. Same three digits, two different countries, two different purposes, no relationship whatsoever. A retiree told they need to file a 720 will reach for the wrong one.
So should an American over 65 never use article 38.3?
That is not our conclusion. A life annuity in euros can be a sensible thing to own: it converts a pile of capital into an income floor for life, in the currency you actually spend, and Spain taxes only a fixed slice of each payment fixed by your age when the annuity is set up. What does not survive scrutiny is buying the annuity because of the exemption. The exemption is the weakest of the available reasons for an American, because it is the one benefit that may simply be handed to the other tax authority. If the annuity is right on its own merits, the Spanish relief is a bonus. If it is not, the relief will not make it right.
Sources reviewed July 2026: Ley 35/2006 del IRPF, articles 25.3, 33.4.b and 38.3, and the AEAT Manual práctico de Renta guidance on the exención por reinversión en rentas vitalicias (six-month period, €240,000 per-taxpayer ceiling, proportional exemption on partial reinvestment, annuity periodicity and 5% decrease conditions, and the obligation to notify the insurer that the annuity constitutes the reinvestment); 26 U.S.C. sections 4371, 4372, 4373 and 4374, and Treasury Regulations 46.4371-2 and 46.4374-1; 26 U.S.C. section 72; the Convention between the United States and Spain for the Avoidance of Double Taxation signed 22 February 1990, articles 2 and 24, as published by the IRS; Revenue Procedure 2003-78 (section 3.01) and Revenue Procedure 2015-46; and the IRS pages "Exemption from Section 4371 excise tax" and its published lists of foreign insurers and reinsurers with closing agreements (A-G, H-M, N-S, T-Z), consulted July 2026, including the IRS caveat that those lists cannot be relied upon as conclusive. General information only, not legal, tax or investment advice, not a US tax opinion, and not insurance mediation — we do not sell, place or receive commission on any insurance product. Whether article 38.3 helps or harms you depends on your figures, the sourcing of your gain, your credit limitation, the identity of the insurer and your filing history, and must be confirmed with a Spanish asesor fiscal and a US tax adviser before you act. The published legal position may change; confirm current rules before relying on this page.