Foreign Pensions
If you receive -- or are eligible to receive -- a pension from a foreign employer or foreign entity, there are certain IRS tax reporting rules that apply to you. Full details have been outlined in this guide.
A foreign pension or annuity distribution is a payment from a pension plan or retirement annuity received from a source outside the United States such as a:
-
Foreign employer.
-
Trust established by a foreign employer.
-
Foreign government or one of its agencies (including a foreign social security pension)
-
Foreign insurance company.
-
foreign trust or other foreign entity designated to pay the annuity.
Taxable Amount
Just as with domestic pensions or annuities, the taxable amount generally is the Gross Distribution minus the Cost (investment in the contract) unless there is a tax treaty provision covering the pension.
Tax Treaties
-
General Rule - Generally, the pension/annuity articles of most tax treaties allow the country of residence to tax the pension or annuity under its domestic laws. This is true unless a treaty provision specifically amends that treatment.,
-
Special Treaty Rules - Some treaties, for example, provide that the country of residence may not tax amounts that would not have been taxable by the other country if the taxpayer were a resident of that country. In some cases, government pensions/annuities or social security payments may be taxable by the government making the payments. There also may be special rules for lump-sum distributions. Practitioners need to look at each treaty carefully., The treaties are available on the IRS website at:
Foreign Residents
If your client lives in a foreign country and receives a pension/annuity paid by a U.S. payer, claim exemption from withholding of U.S. Federal Income Tax (FIT) under a tax treaty by completing Form W-8BEN and delivering it to the U.S. payer. The taxpayer must include their U.S. Taxpayer Identification Number (TIN) on Form W-8BEN for it to be valid for treaty purposes.
U.S. Residents
If the taxpayer resides in the U.S. and receives a pension/annuity paid by a payer from a foreign country and a treaty provision applies, the taxpayer can claim the desired treaty withholding exemption on the form, and in the manner specified by the foreign government. If the foreign government, and/or the foreign withholding agent, refuses to honour the treaty claim, make the treaty claim on the taxpayer’s income tax return, or other prescribed form, filed with the foreign country. Note: Don’t overlook claiming a Foreign Tax Credit on your client’s U.S. federal individual income tax return for any foreign income tax withheld from the foreign pension or annuity which isn’t refundable by filing a return or refund claim with the foreign country.
Foreign Social Security Pensions
Most income tax treaties have special rules for social security payments. In many cases, foreign social security payments are taxable by the country making the payments. Unless specified otherwise in an income tax treaty, foreign social security pensions are generally taxed as if they were foreign pensions or foreign annuities. Unless a tax treaty allows it (see, e.g., the USA Canada treaty), they are not eligible for exclusion from taxable income the way a U.S. social security pension might be.
Selected Treaty Provisions
Caution: these treaty provisions are with the U.S. Federal government and not with the individual states. Consult the state’s rules. For example, California does not recognize foreign treaties and all pension income is taxable to CA including foreign social security equivalents.
-
Canada Treaty - Under the treaty, Canadian Old Age Security (OAS) pensions and Canada/Quebec Pension Plan (CPP/QPP) benefits received by U.S. residents are treated for tax purposes as if they were U.S. social security payments. U.S Social Security benefits received by a Canadian resident are taxable to Canada.
-
Canadian IRA Equivalent Plans - Guidance has been provided by Rev. Proc. 2014-55, which supersedes Rev. Proc. 2002-23, and Notice 2003-75, in regard to the US-Canadian Tax Treaty, and individuals who are citizens or residents of the U.S. and beneficiaries of one of the following Canadian plans which are taxable to the U.S. if the recipient is a U.S. Resident:
-
A registered retirement savings plan (RRSP)
-
A registered retirement income fund (RRIF)
-
A registered pension plan, or
-
A deferred profit-sharing plan.
Distributions received by any U.S. citizen beneficiary or annuitant from a Canadian retirement plan, including the portion of the distribution that constitutes income that has accrued in the plan and has not previously been taxed in the United States, must be included in gross income by the beneficiary or annuitant in the manner provided under IRC Sec. 72, subject to any applicable provision of the Convention (treaty). (Rev. Proc. 2014-55, Sec. 6) Thus, for example, the gross distribution from an RRSP is reported on line 4a of Form 1040 (2020 version), and the taxable amount (as determined under Sec. 72) is included on line 4b of the 1040.
-
United Kingdom Treaty - Pensions and other similar remuneration beneficially owned by a resident of one State are taxed only in that State (“state” is used in the treaties in lieu of “country”). Thus, UK pensions received by a U.S. resident are taxable to the U.S. and U.S. pensions received by a resident of the UK are taxable to the UK. Each country can only tax the amount that would have been taxed in the other country. Therefore, UK residents would not be taxed on qualified Roth distributions or non-deductible IRA distributions. (U.K. Treaty, Art. 17(1))
-
German Treaty – German pension benefits, other than equivalent social security benefits, paid to a U.S resident are taxable to the U.S. just as if they were earned in the U.S., German equivalent social security benefits paid to a U.S. resident are taxed in the same manner and same exclusion as U.S. Social Security benefits., CAUTION – Germany recently altered its domestic tax policy and the above rules may change in the near future.
-
French Treaty – According to the French treaty, pensions paid for past employment in France are only taxable to France., However, French pension payments made to a U.S. resident are also taxable by the U.S., and the only relief is through claiming a foreign tax credit.,
-
India Treaty – Under a treaty with India, social security benefits and other public pensions paid by India to a resident of the U.S. are taxable only by India and not included in U.S. income. Social security benefits paid to individuals who are both residents and nationals of India are exempt from U.S. tax if the benefits are for services performed for the United States, its subdivisions, or local government authorities.