tax treaty info
Hi..in regards to countries that have a tax treaty with the US that results in 15% vs 30% withholding..does the foreign beneficiary usually have to pay an additional tax on the benefit to his country?
Hi..in regards to countries that have a tax treaty with the US that results in 15% vs 30% withholding..does the foreign beneficiary usually have to pay an additional tax on the benefit to his country?
Permalink Submitted by Bruce Steiner on Thu, 2015-02-26 22:00
It depends on the tax rate in the other country.
Permalink Submitted by Mary Stockton on Tue, 2016-02-09 17:36
Seems almost too good to be true that IRA distributions would escape US tax because of a treaty. I have a 32 year old Chinese national client whose 58 year old American husband died last year. He held about $225K in his US 401K and $70K in his US regular IRA and she is the sole beneficiary. She does not want to leave the funds in the US long term, so she is considering structuring both accounts as inherited IRAs and taking the funds out over the next few years. (The accounts may have been earned partially while he was working outside the US but the balances are all in US qualified retirement accounts). My puzzle is whether distributions will qualify for treaty exemption as pension distributions. Even though I’ve been in expatriate tax for about 30 years, I’ve never seen what happens when a foreigner takes distributions from a US IRA. The US-China treaty has a provision: ARTICLE 17 (Pensions and Annuities) 1. Subject to the provisions of paragraph 2 of Article 18, pensions and other similar remuneration paid to a resident of a Contracting State (i.e. a resident of China) in consideration of past employment shall be taxable only in that Contracting State (i.e. China). Honestly, this seems almost too good to be true, and I’m afraid the distributions would be taxable as IRD and fully taxed in the US despite the treaty.
Permalink Submitted by Mary Stockton on Tue, 2016-02-09 17:50
By the way I’m disregarding the concerns about withholding. If we get treaty exemption, we will get withholding exemption. I found the US Model Treaty Explanation which specifically includes IRAs in the definition of pensions: Paragraph 1 Paragraph 1 provides that distributions from pensions and other similar remuneration beneficially owned by a resident of a Contracting State in consideration of past employment are taxable only in the State of residence of the beneficiary. The term “pensions and other similar remuneration” includes both periodic and single sum payments. The phrase Apensions and other similar remuneration@ is intended to encompass payments made by qualified private retirement plans. In the United States, the plans encompassed by Paragraph 1 include: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts and section 408(p) accounts), section 403(a) qualified annuity plans, and section 403(b) plans. Distributions from section 457 plans may also fall under Paragraph 1 if they are not paid with respect to government services covered by Article 19. Therefore I’m thinking I will instruct the client to take the IRA in thee shortest manner possible – probably 5 years but maybe all at once based on the above – and it should be US tax exempt under the treaty. She will have chinese tax to the extent China taxes pension income – I don’t know about that.Anyone see any problems with this?Thanks in advance