Thun Financial Advisors Research ©| 2017 1
Thun Financial Advisors Research 2017
Thun Financial Advisors 3330 University Ave. Suite 202 Madison WI 53705 www.thunfinancial.com Skype: thunfinancial
Thun Financial Advisors, L.L.C.
is a U.S.-based, fee-only, Regis-
tered Investment Advisor that
provides investment manage-
ment and financial planning
services to Americans residing
in the U.S. and overseas.
We maximize long-term
wealth accumulation for our
clients by combining an index
allocation investment model
with strategic tax, currency,
retirement and estate plan-
ning. We guard our clients’
wealth as though it was our
own by emphasizing prudent
diversification with a focus on
wealth preservation and
growth.
The Foreign Pension Plan
Dilemma for American Expats
Executive Summary
This article addresses the chief concerns for Americans living in
foreign countries and their pension options. Provides an over-
view of:
These pension options: SIPPs from the UK, Superannuated
pensions from Australia, the Swiss Pillar pension system,
etc.
The general tax treaties governing the relationship between
local pensions and US taxation. Also describes the tax and
reporting ramifications of foreign pensions both in the US
and locally
The effects of these pensions on the overall financial plans
of American expatriates.
Introduction
American citizens living abroad often participate in foreign pension
plans, which generally have beneficial tax treatment under local country
of residence laws . Furthermore, participation might even be mandatory
and employers often make valuable pension contributions on behalf of
Thun Financial Advisors Research ©| 2017 2
their employees. However, even in light of all
these benefits, American taxpayers must remain
aware that not all foreign pension plans receive
favorable tax treatment under U.S. tax laws and
that participation could actually be detrimental to
long-term financial planning goals.
In order to avoid retirement planning pitfalls, U.S.
taxpayers with overseas pensions must carefully
examine their pension plans under relevant U.S.
tax laws and bilateral tax treaties. Foreign pen-
sions are an area that American taxpayers can no
longer ignore as the Foreign Account Tax Compli-
ance Act (FATCA) and increased cross-border tax
compliance suggests that the IRS may take a closer
look at these assets going forward (especially so-
called “offshore pension schemes”). This Thun Fi-
nancial article briefly summarizes common issues
related to foreign pension plans and demonstrates
how to integrate foreign pension plans into a com-
prehensive cross-border retirement plan.
U.S. Taxpayers and Foreign Pension Plans
Many countries allow workers to defer pre-tax
dollars into retirement accounts that then accu-
mulate tax free until retirement. These systems of
tax deferred savings and investment exist every-
where for the same reasons they exist in the Unit-
ed States : governments want to encourage work-
ers to accumulate private savings to support re-
tirement expenditures without exclusive reliance
on state pension systems.
Foreign pension plans commonly encountered by
Americans abroad include:
Swiss Pillar Pension System Canadian RRSPs Hong Kong Mandatory Provident Fund
(MPF) and Occupational Retirement Schemes Ordinance (ORSO)
Singapore Central Provident Fund (CPF) Australian Superannuation French Caisses de Retraites UK Employer Sponsored Pension Schemes
and SIPPs
Unfortunately, the U.S. worldwide system of citi-
zen-based taxation was instituted before modern
pension plans and long before the advent of an in-
ternationally mobile work force. Consequently,
current U.S. tax laws do not favor participation in
most foreign pension plans and the IRS generally
views foreign pension plans, including ones
“qualified” under local tax rules, as "nonqualified"
under U.S. tax rules.
However, there are some U.S. income tax treaties
which allow foreign pension plans to be treated as
qualified for U.S. tax purposes. One such example
is the United States-United Kingdom income tax
treaty. Unlike many tax treaties the United States
has with foreign countries, the U.S.-UK treaty ad-
dresses pensions comprehensively, with rules re-
lated to contributions, earnings, and distributions.
For example, while living in London, an American
can deduct, for U.S. tax purposes, contributions to
their UK pension plan. This deduction is only
available while the U.S. taxpayer resides in the
United Kingdom. Additionally, it applies only to
the extent the contributions or benefits qualify for
tax relief under HMRC (UK tax authority) rules
and the HRMC relief may not exceed the relief that
is allowed in the United States under IRS regula-
tions.
Thun Financial Advisors Research ©| 2017 3
Outside of the United Kingdom, these special tax
treaty provisions are rare: Most foreign pensions
do not enjoy tax favored status. For example, the
United States does not have tax treaties covering
pension contributions with many popular expat
destinations such as France, the Netherlands,
Hong Kong, and Singapore. Absent such a compre-
hensive tax treaty, an American expat participat-
ing in a foreign pension plan cannot deduct contri-
butions from their U.S. gross income and must
take extra steps to properly report the pension
assets.
Staying Compliant: Properly Report-ing Foreign Pensions as a U.S. Taxpayer
One important unintended consequence of the
FATCA law is that U.S. taxpayers participating in
foreign pension plans can no longer casually fail to
report their participation in these plans on their
U.S. tax returns. Before FATCA, participation by
American expat workers in foreign pension plans
often drew them into a pattern of systematic non-
compliance—many investors did not even think to
report these pension plans until retirement distri-
butions commenced. However, FATCA now pro-
vides the IRS with a viable mechanism to enforce
rules requiring foreign pension plans to be report-
Malta Pensions and “Offshore Pension Schemes” for Americans
Increasingly, American expats in locales such as Singapore, Hong Kong, and Dubai are being mar-
keted offshore pension schemes based in the Mediterranean island nation of Malta. Many offshore
financial advisors promote these plans as a tax efficient way for American expats to save for retire-
ment while working abroad. Although it is true that the United States and Malta recently signed a
modern double tax treaty that provides certain tax benefits, it is doubtful that the generous inter-
pretation of these tax provisions offered by plan promoters will hold up under eventual IRS scruti-
ny. Therefore, we believe that Americans investing in such schemes are taking on substantial tax
compliance and investment risk.
The U.S.-Malta double taxation treaty signed in 2010 created a flurry of activity in the U.S. expat fi-
nancial space because key provisions of the treaty appear to permit American taxpayers to accumu-
late untaxed gains in a Malta pension and then withdraw those assets tax free. There are several
problems with this attractive reading of the treaty. First, it is unlikely that the treaty was intended
to provide for a glaring exception to the main tenants of U.S. citizen-based taxation. Second, and
even more critically, these plans gloss over the issues of residency and jurisdiction. The treaty does
not cover Americans who do not reside in Malta, or at least do not reside in Malta at the time contri-
butions to the plan were made. In short, Americans living outside of Malta have no standing to
make claims under the treaty’s provisions.
Aside from the tax and compliance risk posed by these plans, the investment provisions of these
plans are highly unattractive. In general, most of these pension plans require a large ongoing finan-
cial commitment. Moreover, liquidity is low, fees are high, and the underlying investments are
opaque. Finally, there is significant concern over the regulatory and financial capacity of the small
state of Malta to thoroughly ensure the integrity and solvency of these offshore pension plans.
Thun Financial Advisors Research ©| 2017 4
ed and taxed to an extent that was not possible
before FATCA.
Luckily, FATCA regulations contain several provi-
sions designed to exempt certain foreign retire-
ment and pensions funds from FATCA reporting.
This means the pension account holders’ identities
will not be automatically reported to the IRS.
However, this does NOT mean that Americans
with foreign pensions can ignore these assets
when filing a U.S. tax return. It is essential that U.S.
taxpayers take proactive steps to report foreign
pension assets on their yearly tax returns to avoid
IRS penalties and fines.
To complicate this problem, reporting a foreign
pension properly on a U.S. tax return is a time con-
suming and expensive accounting task. Participa-
tion in a foreign pension will generally require
Form 8938, Foreign Bank Account Report (FBAR
or FinCen 114), and possibly Form 3520 relating
to U.S. owners of foreign trusts. If the pension plan
does not meet certain requirements, Form 8621
reporting for Passive Foreign Investment Compa-
nies (PFICs) may also need to be filed to report
underlying investments if the pension is classified
as a grantor trust. Proper compliance is complicat-
ed by the lack of information from the foreign pen-
sion plan sponsor and uncertainty regarding the
best reporting methods among tax preparers.
There is also significant uncertainty amongst tax
experts on the application of U.S. tax rules and tax
treaties to such nonqualified plans. However, sev-
eral broad generalizations can be made about for-
eign pension tax compliance. First, the taxpayer
generally must include the amount of vested pen-
sion contributions made by the employer and the
employee in their gross income. They may also be
required to include in gross income the invest-
ment earnings on plan assets even if unrealized.
Finally, depending on the country and method
used, taxes might need to be paid upon final distri-
bution from the pension plan.
Incorporating Foreign Pensions into a Comprehensive Retirement Plan
The absence of treaty protection and lack of tax
qualified status does not automatically make par-
ticipation in a foreign pension plan a bad idea.
Several strategies can be used to make invest-
ments within pension plans U.S. tax compliant and
efficient. Whatever reporting method used, it is
essential to keep the tax treatment consistent be-
tween different filing years. Using different meth-
ods to file and report the pension year-to-year cre-
ates a risk that double taxation may occur.
If an American investor resides in a country with
income tax rates that are higher than correspond-
ing U.S. rates, excess foreign tax credits are likely
to accrue. Furthermore, if no treaty provision ex-
ists to provide a U.S. tax deduction for local pen-
sion contributions, contributions will only reduce
local country current taxation. However, because
there are still sufficient foreign tax credits availa-
ble to offset all the corresponding U.S. tax on these
contributions, contributing to the plan reduces net
current taxation. Furthermore, for U.S. tax ac-
counting purposes, the pension plan now has a tax
basis equal to the original contribution amounts.
In retirement, the return of this basis as a part of
normal pension distributions will therefore be tax
free for U.S. purposes. Hence, where no treaty
provision exists to qualify the local pension for
U.S. tax purposes, optimal planning would require
contributions to the local pension in an amount
that results in an equalization of the local tax due
with U.S tax, leaving no excess foreign tax credits.
This approach has the virtue of using up foreign
tax credits (which otherwise may never be used)
and reducing the level of U.S. taxation on future
distributions. Finally, even where net U.S. and lo-
cal taxation of pension plans is unfavorable, gener-
Thun Financial Advisors Research ©| 2017 5
ous employer contributions and employer tax equalization policies may still make pension plan partici-
pation worthwhile for highly compensated U.S. expats.
A common misconception is that funds from a foreign pension plan may be rolled over into a U.S. quali-
fied retirement plan such as a 401k, IRA, or Roth IRA account. However, this is never possible with any
type of foreign retirement account. A much more common scenario is that the foreign country will allow
an expat to withdraw funds when they permanently leave the country. The ability to withdraw funds
from a local plan is very country specific. This option must be examined under local country of residence
law with the assistance of a local legal/tax expert.
Conclusion: What to do with Foreign Pensions?
FATCA is essentially forcing the IRS to confront the fact that the U.S. system of global taxation is incon-
sistent with normal participation in traditional methods of retirement and investing for American work-
ers abroad . However, because these problems with FATCA have not yet been resolved, US taxpayers
don’t have the option of ignoring foreign pensions. American expatriates need to become familiar with
the relevant tax laws that effect their foreign pensions. Given the potential tax exposure and large penal-
ties, it is important to plan ahead to understand the tax treatment of these pension plans and their tax
reporting requirements. In order to avoid future problems, Americans living abroad should also be
aware of the tax treatment of contributions to and distributions from these foreign plans—taxation of
distributions must be minimized, fees reduced, and the investment options of the pension plan must be
analyzed. After a careful analysis, it might not be efficient for an American abroad to participate in a for-
eign pension plan or for them to simply maximize their contributions. Careful asset allocation across dif-
ferent accounts such as a taxable brokerage, 401k, IRA, Roth IRA, and a foreign pension is essential to
achieve tax efficiency and maximum after-tax returns for successful retirement saving and greater over-
all wealth accumulation. Ultimately, most Americans abroad will find that U.S. onshore investments,
managed with an eye on tax efficiency and cross-border tax compliance are the best way to build wealth.
Thun Financial Advisors Research is the leading provider of financial planning research for cross-border and American
expatriate investors. Based in Madison, Wisconsin, David Kuenzi and Thun Financial Advisors’ Research have been featured in
the Wall Street Journal, Emerging Money, Investment News, International Advisor, Financial Planning Magazine and Wealth
Management among other publications.
Thun Financial Advisors Research ©| 2017 6
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Thun Financial Advisors L.L.C. (the “Advisor”) is an investment adviser registered with the United States Securities and Exchange Commission
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ness are not guaranteed by the Advisor.
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antee future performance will be similar. Future results may be affected by changing market circumstances, economic and business conditions, fees,
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lar investments may result in a loss of in investment capital.
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