Monday, June 9, 2014

New US Spain tax protocol and IRS regulations simplify Spanish pension plan reporting

If you have a retirement plan here in Spain and you’ve been wondering how to declare it, the governments of Spain and the US have made things much easier. In the past, Spanish pension plans were not considered “qualified” and thus had to be treated and taxed under the horribly complicated and expensive PFIC regime.

First, there have been some new temporary PFIC regulations that have been published by the IRS in January 2014 (effective for 2013 returns) that state:

The temporary regulations provide that US persons who are beneficiaries of foreign pension and retirement plans must file Form 8621 with respect to any PFIC investments held inside the pension fund unless, pursuant to an income tax treaty, “income earned by the pension fund may be taxed as the income of the [beneficiary] only when and to the extent the income is paid” to the beneficiary.  Not all US income tax treaties provide the specific language referenced in the temporary regulations to alleviate the Form 8621 filing requirement.

At first reading, it looked like the US Spain Tax treaty doesn’t have the required clause, but then I remembered that there’s a new amended Protocol from 2013. And guess what? They added this:

“5. Where an individual who is a resident of one of the Contracting States is a member or beneficiary of, or participant in, a pension fund that is a resident of the other Contracting State, income earned by the pension fund may be taxed as income of that individual only when, and, subject to the provisions of subparagraph (a) of paragraph 1 of Article 20 (Pensions, Annuities, Alimony and Child Support), to the extent that, it is paid to, or for the benefit of, that individual from the pension fund (and not transferred to another pension fund in that other Contracting State).”

Unfortunately, the new tax treaty hasn’t been ratified by the US Senate (thank you Rand Paul), so it looks like you shouldn’t withdraw anything until this happens, or you may be subject the PFIC and all its glory.

Of course, you still need to report the account on your FBAR and Form 8938, but at least you don’t need to worry about being taxed on the income until you take it out. Interestingly, the clause seems to leave open the possibility of a tax free transfer of a retirement account from one country to another.

1 comment:

Anonymous said...

On the other hand, it seems now that with the new amendment, Spain acknowledges a 401k or IRA as a pension fund and it will tax you on withdrawal. Still not clear how the "tax deferred" part of those plans is handled though.

I really appreciate these tax topics, trying to learn as much as possible to be ready for the move.