Navigating Cross-Border Retirement & Pension Plan US Taxation

Exploring Cross-Border Tax of Retirement & Pension Plans

Exploring Cross-Border Tax of Retirement & Pension Plans

United States Persons who have pension plans from abroad may be subject to various US tax and reporting requirements depending on the type of foreign pension; whether the pension is from employment — or a personal investment pension; and the value of the pension plan. In addition, depending on whether or not there is a tax treaty between the United States and the foreign country — such as the US/UK Tax Treaty will help determine whether or not the foreign pension plan is taxable in the United States – – and whether it has to be reported on one or several international information reporting forms such as FBAR or FATCA. Whether it is a UK-based SIPP; Australian Superannuation; Singaporean Central Provident Fund, or India Employee Provident Fund, the tax rules are very important — so let’s go through five important facts.

Tax Treaty with the Cross-Border Retirement & Pension Plan Country?

One of the most important aspects of the US tax and reporting of a cross-border retirement or pension plan is whether or not there is a tax treaty in place with the foreign country of source and/or residence. If there is a tax treaty with a foreign country, then taxation of the growth and contributions may be limited depending on the specifics of the tax treaty. For example, in the UK, certain contributions that are made by a US Person to a foreign employment pension in that country are also exempt from US tax  — up to the exclusion amount that is allowable for US comparable pension plans – such as a 401K. When there is no tax treaty in place, then generally the growth is going to be taxable — even if it is not distributed.

Distributions from the Cross-Border Retirement & Pension Plan?

In general, when a US person receives distributions from a foreign pension, those distributions are going to be taxed under US tax law. While this is the baseline position there are various exceptions, exclusions, and limitations –– such as whether the Taxpayer was a US person when the pension was earned. In addition, if there is a treaty in place, then the Taxpayer may take a tax treaty position to be treated as a foreign person for tax purposes and then they qualify to exclude foreign pension income from their US tax.

Personal or Employment Cross-Border Retirement & Pension Plan?

Many countries have items that are referred to as personal pension plans, which are not employment-based investments. but more of an investment wrapper. In other words, while the investment may be referred to as a pension plan, it was not the result of employment and therefore the investor is essentially just contributing into an investment plan which may be used later for “retirement” – but it is not technically a qualified pension under US tax law. Some examples of this would be the Public Provident Funds in India and the ISA in the UK. Depending on the type of investments (stock and bonds versus funds) will impact whether it is immediately taxable now — or whether it is reportable as a PFIC but taxable at a later date once distributions are made — or there is a terminating event.

Private or Public Cross-Border Retirement & Pension Plan

This is more of an issue when there is a treaty at play. For the most part, most treaties will have a provision that provides that private pension is only taxable in the resident country — although this is normally rendered moot by the saving clause – whereas public pension and/or Social Security are only taxable in the source country — subject to certain issues involving the US person status of the taxpayer receiving the income.  

US Person Status

Depending on whether the taxpayer is a US citizen, Lawful Permanent Resident, or a foreign national who meets the  Substantial Presence Test will impact their ability to avoid having to pay US taxes or making a treaty election. Taxpayers who are US citizens are typically stuck with their US person status, whereas permanent residents may be able to make a treaty position to be treated as a foreign person — and non-residents who need the substantial presence test may be able to exclude US tax based on meeting the Closer Connection Exception.

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