Taxation of Foreign Pension Contributions

For migrants or people living outside of their native country who are working abroad, participation in a foreign pension plan can complicate an already complicated tax scheme.  Expatriates often run the risk of adverse tax treatment of contributions made to a foreign pension plan.  One would think that if you’re covered by a pension plan similar to any 401k you’d be covered under if you worked in the U.S., then everything should be okay, right?  Unfortunately, that is not always the case.

The reason it gets tricky is that foreign pension plans are usually not qualified plans as that term is defined in the Internal Revenue Code.  Only contributions made to a qualified plan are excludible from income of the employee.  Contributions made under a plan that does not qualify must be included in income and taxed – since the U.S. taxes its citizens on income wherever earned, even if it’s earned in a foreign country.  And to pile on here, you may also have to include the internal earning in the plan assets in your taxable income as well (again, because the plan is not a qualified plan).

The foreign tax credit may provide some relief from these provisions.  In addition, foreign tax treaties have specific provisions addressing, and mitigating, these harsh results.  But the application of a treaty to your situation is country specific. If a treaty is applicable, then if your foreign pension plan is treated like an income exempt (a “qualified” plan) under the country where you are working, the U.S. will treat it like a qualified plan with regard to your U.S. taxable income as well.  Thus you won’t have to include the contributions and internal earnings in your U.S. taxable income.

If you work in a foreign country or have an interest in a foreign pension and need to asses your tax obligations, then schedule your free consultation by calling (480) 888-7111 or submit a web request here.