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    Wednesday 26 June 2019

    Foreign assets and pension investments in the spotlight in the US

    The US tax authorities are putting US citizens’ participation in foreign pension plans under increasing scrutiny.

    US taxpayers are required to report on the value of an interest in a foreign pension plan following the introduction of the Statement of Specified Foreign Financial Assets (Form 8938). The guidance on this issue is extremely complex, so taxpayers need to ensure that they don’t unwittingly fall foul of the requirements, potentially exposing them to draconian penalties for under-reporting of foreign assets and investments, not to mention income.

    Few, if any, foreign pensions satisfy the US qualification requirements. The exceptions to this general rule are plans that were formed specifically with US citizens/residents in mind, for example by multinational corporations. It is unlikely that a foreign pension plan, organised in a country where the US employee received employer contributions, will be treated for US tax purposes like a US pension plan organised by a US employer. The US Internal Revenue Code does not provide for different treatment of foreign pension plans, so guidance on domestic regulations is needed.

    Foreign treaty provisions
    A limited number of income tax treaties between the US and other countries contain favourable provisions with respect to pension plan taxation. Generally, such provisions are available to US citizens/residents. In summary:
    • Almost all treaties contain a provision that limits the ability to tax pension distributions in the country where the taxpayer is resident. 
    • A few treaties contain provisions that defer taxation of pension earnings until distributions are paid to, or for the benefit of, the individual. Such treaties include those of Belgium, Iceland, Bulgaria, Malta, Canada, Netherlands, Germany, the UK and Hungary (proposed).
    • Treaties in Belgium, Netherlands, Canada, the UK and Germany contain provisions that allow US citizens/residents making contributions to pension plans organised in these countries, to deduct the contributions for US tax purposes while resident in these countries and working for resident employers with permanent establishments in the countries.
    • Another group of treaties contain provisions that allow a person participating in a ‘home country’ pension plan to contribute to such a plan and claim a tax deduction in the other country, while performing services in the other country. This provision is generally limited to use by resident aliens who are not permanent residents. Relevant treaties include those of Canada, South Africa, France, Sweden, Ireland, the UK and Italy.
    One final twist
    Employer contributions to a non-qualifying employee trust are excluded from the definition of foreign-earned income for the purposes of calculating the foreign-earned income exclusion. Other than in the case of favorable treaty benefits, employer contributions are included in the taxpayer’s taxable income, for US income tax purposes.
    For more information, contact:
    Lawrence J Chastang
    CliftonLarsonAllen, US
    T +1 407 802 1200
    E lawrence.chastang@cliftonlarsonallen.com

    Steve Yeager
    CliftonLarsonAllen, US
    T +1 407 802 1200
    E steve.yeager@cliftonlarsonallen.com

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