The Internal Revenue Service (IRS) – starting to see some light with respect to “foreign” pension plans? The US tax issues surrounding foreign pensions and retirement schemes is extremely complex and has vexed tax professionals and US persons abroad for many years. (Read my earlier blog post here). Due to the diversity of such plans, professionals have little guidance on how to treat them. There is always a glitch that throws a proverbial wrench in the tax works!
The IRS just announced some possible relief. The announcement was just made. I need more time to fully absorb Revenue Procedure 2020-17, but it looks promising. This post serves as an update and head’s up. I will keep you apprised.
The fact that the Procedure will be published in the Internal Revenue Bulletin (IRB) is very significant. Readers of my blog know that the IRB is the ONLY “official source” for IRS information. Once the IRS posts information in the IRB, it means you can rely on it! According to IRS officials, only guidance published in the IRB is binding on the IRS and can be relied upon by taxpayers as authoritative.
Revenue Procedure 2020-17
The Revenue Procedure exempts from foreign trust information reporting requirements certain U.S. individuals’ transactions with, and ownership of, certain tax-favored foreign trusts that are established and operated exclusively or almost exclusively to provide pension or retirement benefits, or to provide medical, disability, or educational benefits. In addition, this revenue procedure provides procedural guidance for certain eligible individuals on how to request abatement of penalties that have been assessed, or refunds of penalties that have been paid, for a failure to comply with the information reporting requirements regarding these foreign trusts.
Revenue Procedure 2020-17 will be in IRB 2020-12, dated March 16, 2020.
Contact me for help firstname.lastname@example.org if you have an interest in a foreign plan and think you may be eligible for the exemption from foreign trust information filings, or believe you may qualify for penalty abatement or refunds for penalties paid with respect to such filings.
The types of trusts that are covered by the revenue procedure must be either a so-called “Tax-Favored Foreign Retirement Trust” or a “Tax-Favored Foreign Nonretirement Savings Trust”. To give you an idea of the complexity of the issues, let’s look at how the revenue procedure defines a “tax-favored foreign retirement trust.” This means a foreign trust for U.S. tax purposes (this in itself is not an easy determination, as you can see from my blog post here) that is created, organized, or otherwise established under the laws of a foreign jurisdiction (the trust’s jurisdiction) as a trust, plan, fund, scheme, or other arrangement (collectively, a trust) to operate exclusively or almost exclusively to provide, or to earn income for the provision of, pension or retirement benefits and ancillary or incidental benefits, and that meets the following requirements established by the laws of the trust’s jurisdiction.
(1) The trust is generally exempt from income tax or is otherwise tax-favored under the laws of the trust’s jurisdiction. For purposes of this revenue procedure, a trust is tax-favored if it meets any one or more of the following conditions: (i) contributions to the trust that would otherwise be subject to tax are deductible or excluded from income, are taxed at a reduced rate, give rise to a tax credit, or are otherwise eligible for another tax benefit (such as a government subsidy or contribution); and (ii) taxation of investment income earned by the trust is deferred until distribution or the investment income is taxed at a reduced rate.
(2) Annual information reporting with respect to the trust (or of its participants or beneficiaries) is provided, or is otherwise available, to the relevant tax authorities in the trust’s jurisdiction.
(3) Only contributions with respect to income earned from the performance of personal services are permitted.
(4) Contributions to the trust are limited by a percentage of earned income of the participant, are subject to an annual limit of $50,000 or less to the trust, or are subject to a lifetime limit of $1,000,000 or less to the trust. These contribution limits are determined using the U.S. Treasury Bureau of Fiscal Service foreign currency conversion rate on the last day of the tax year (available here).
(5) Withdrawals, distributions, or payments from the trust are conditioned upon reaching a specified retirement age, disability, or death, or penalties apply to withdrawals, distributions, or payments made before such conditions are met. A trust that otherwise meets the requirements of the definition, but that allows withdrawals, distributions, or payments for in-service loans or for reasons such as hardship, educational purposes, or the purchase of a primary residence, will be treated
as meeting the requirements.
(6) In the case of an employer-maintained trust, (i) the trust is nondiscriminatory insofar as a wide range of employees, including rank and file employees, must be eligible to make or receive contributions or accrue benefits under the terms of the trust (alone or in combination with other comparable plans), (ii) the trust (alone or in combination with other comparable plans) actually provides significant benefits for a substantial majority of eligible employees, and (iii) the benefits actually provided under the trust to eligible employees are nondiscriminatory.
A trust that otherwise meets the requirements will not fail to be treated as a tax-favored foreign retirement trust solely because it may receive a rollover of assets or funds transferred from another tax favored foreign retirement trust established and operated under the laws of the same jurisdiction, provided that the trust transferring assets or funds also meets the requirements as a tax-favored foreign retirement trust.
I am not surprised at the complexity here…. this entire area of tax law is truly “a riddle wrapped in a mystery inside an enigma“.
Posted March 4, 2020
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