Complexities abound for international assignees' foreign pensions
TAX BLOG |
Employees working on international assignment raise significant tax planning complexities for both the globally mobile employees and their employers. One especially complex topic is the treatment of employees’ foreign pension plans. Whether it is a foreign national working in the U.S. or a U.S. citizen living and working abroad, the complexities abound and are evident in the multiple filings that may be required to satisfy U.S. reporting requirements. Possible filings include:
- Foreign Bank Account form (Form 114)
- Foreign trust reporting forms (Form 3520 and 3520-A)
- Statement of Specified Foreign Financial Assets (Form 8938)
- Passive foreign investment company (PFIC) form (Form 8621)
- Form 8833 to claim the income tax treaty exemption from U.S. taxation on contributions to the plan and/or accrued income under the plan.
Along with added reporting complexities comes additional tax costs. Foreign country pension plans, which enjoy beneficial tax treatment in their national jurisdiction, can create an additional tax burden in the U.S. For example, the majority of non-U.S. pension plans are generally held in investments that the U.S. considers PFICs which are subject to much higher rates (generally ordinary rates apply in lieu of capital gain rates) than similar U.S. based investments.
In some situations, regulations or tax treaties may provide an exception to the punitive treatment of certain foreign pensions. Absent an exception, pre-tax contributions may become post-tax deductions, employer contributions may become taxed at time of contribution, and growth in the plan may now be taxed as it grows. U.S. tax treaties with the U.K. and Netherlands generally put the employee back into a positive tax situation however many U.S. tax treaties do not provide enough protection, and some have no protections at all.
Being aware of added tax and reporting burdens prior to the assignee’s move can allow for successful pre-planning and help ensure a successful assignment. Companies with multiple globally mobile employees should consider establishing an international assignment policy so the additional burdens are accounted for and do not come as a surprise to the employee. Individuals considering an international assignment opportunity should speak with their tax advisors and employer in order to understand the additional burdens associated with the assignment and who bears that burden.
For more information on the treatment of foreign pensions please see our article “Foreign Pension and US Tax Planning for International Assignments."