kansanbrit

I am a US citizen now (2007) and I have recently moved my two UK pensions into a QROPS in Malta and took a 30% lump sum (larger than UK 25%). I took advice before doing so and am 'fairly confident' that I will not have to pay US taxes on that amount.

i checked the two tax treaty documents (UK and Maltese) and found are very similar but they differ in as much as paragraph 17.2 in the UK treaty, which relates to lump sums, is omitted from the Maltese version. Therefore para 17.1 (b) in the Maltese agreement is the only paragraph which relates to tax free amounts and is listed in para 1.5 which makes it unaffected by para 1.4. Therefore I conclude my lump sum from my Maltese QROPS will be tax free.

Owen778

QROPS?

kansanbrit

Qualified Recognised Overseas Pension Scheme.......more details on Google.

nun

Kansanbrit, where did you get your advice?

The US tax free status of a QROPS is not certain, so you have to have a good
argument worked out if your are questioned. I don't see how the lump sum would be US tax free.

kansanbrit

Advice was obtained from George Hayduk, who apparently is an New England based international tax adviser, by STM Life Health & Pensions and his view on this was......

"6. Distributions from the QROP will be taxable for USC and tax residents at the applicable federal tax rates.
A 25% lump sum distribution is tax-free distribution under UK tax law. The Plan provides for similar treatment. Article 17.1, subparagraph (b) contains a provision that provides that if an amount is paid from a pension (in the UK) that would be exempt from tax (in the UK) if the beneficial owner were a resident of such state (UK), then it shall be exempt from tax in the state where you reside for tax purposes (the US). . Article 17.2 states that only the UK can tax “lump sum” distributions. Article 1.4 of the US-UK Tax Treaty contains what is known as the “Savings Clause”. It essentially negates treaty benefits for citizens of the US and allows the US to tax its citizens as if the treaty had not come into effect. Article 1.5 of the Treaty states that Article 1.4 (the “Savings Clause”) shall not affect “benefits conferred by subparagraph (b) of Article 17.1 (the “Pensions Article”). In other words, if Article 17.1 is the provision that governs the 25% lump sum the Savings Clause does not apply, the literal terms of Article 17.1 do apply and those terms mandate that the US recognize the UK tax free nature of the distribution.
The foregoing exemption from the Savings Clause specifically does not apply to Article 17.2 which deals with “lump sum distributions” from pensions. In other words, the US would reserve the right to tax its citizens on such distributions notwithstanding the otherwise favorable language in Article 17.2. “Lump sum” is not defined in the Treaty. Where a term is not defined in a treaty it shall take on the meaning it has under the laws of the State (US) attempting to tax the relevant transaction. Under US tax law “lump sum” essentially means a complete liquidation of pension or retirement rights (IRC Sec. 402(d)(4)(A)). While the term “lump sum” is often used in the UK to refer to 25% tax-free distributions, lump sum clearly takes on a different meaning in the UK as the complete pension has not been liquidated. The Plan or its predecessor UK Plan otherwise remains intact. It is my opinion that Article 17.2 does not apply to the subject pension distribution and that Article 17.1 is the relevant treaty provision. The foregoing references are to the UK Treaty but Malta Treaty mirrors the UK Treaty
Applying the language of either treaty, it is my opinion that Article 17.1 is the operative clause, the IRS may however disagree and conclude that Article 17.2 is the operative clause. The Technical Explanation to the UK Treaty sheds some light on US side thinking –basis after tax contributions."

Also a CPA in Knoxville, TN stated....

"We have reviewed the US/Malta tax treaty. The following are the observations we have with regard to the tax treaty:

1. A qualifying Malta “pension fund” is (a) a licensed fund or scheme subject to tax only on income derived from immovable property situated in Malta and, (b) operated principally to administer or provide pension or retirement benefits. Based on this definition, you will want to confirm the QROPS in Malta will be considered a licensed fund or scheme.
2. Pensions, social security and annuities will be taxed as follows:
a. Pensions and other similar payments are taxed in the State of residence, which is obviously the US in your case. If any amount would be tax-exempt in the State of payment if the beneficiary were a resident of that State, then it will be tax-exempt in the State of residence.
b. Social security and other similar payments are taxable in the State of payment.
c. Annuity payments are taxable in the State of residence.

Based on these observations, it appears a transfer to the Maltese QROPS and subsequent disbursements to you will be taxed in a manner similar to withdrawals from a US retirement plan."

However, as I said earlier there is a difference in the two treaties that I read although George Hayduk states that they mirror each other.

lansbury

and page 63/64 of the Technical Explanation indicates that the IRS thinks a lump sum is taxable in the USA.

kansanbrit

The technical explanations I looked at had many more pages than 64, can you be more specific please ?

MidAtlantic

Pages 63 & 64 is about as specific as it gets.

kansanbrit

Well it could be the Maltese document or the UK document. But that's OK I'll check both.

nun

The key is the lack of a lump sum payment clause in the Maltese treaty. However, the biggest issue I see is whether the QROPS transfer is seen by the IRS as a taxable event or not. That's the first thing to find out

theOAP

Per the George Hayduk quote in OP post #80:

"Article 1.5 of the Treaty states that Article 1.4 (the “Savings Clause”) shall not affect “benefits conferred by subparagraph (b) of Article 17.1 (the “Pensions Article”). In other words, if Article 17.1 is the provision that governs the 25% lump sum the Savings Clause does not apply, the literal terms of Article 17.1 do apply and those terms mandate that the US recognize the UK tax free nature of the distribution.".......

"Article 17.1, subparagraph (b) contains a provision that provides that if an amount is paid from a pension (in the UK) that would be exempt from tax (in the UK) if the beneficial owner were a resident of such state (UK), then it shall be exempt from tax in the state where you reside for tax purposes (the US)."

"It is my opinion that Article 17.2 does not apply to the subject pension distribution and that Article 17.1 is the relevant treaty provision."

Interesting position.

Article 17.1, subparagraph (a) is subject to the saving clause; Article 17.1, subparagraph (b) is not subject to the saving clause. Article 17.2 (which is dedicated to "lump sums"), is subject to the saving clause.

The document we are referring to, the Tech. Explanation (2001), US/UK Treaty
http://www.treasury.gov/resource-cen...ts/teus-uk.pdf

theOAP

I haven't checked; are you saying there is no Article 17.2 (or paragraph 2) in the Maltese/US Treaty? George Hayduk says they mirror each other. Just re-read the OP post about no Para 2 in the Maltese version, so George is depending on the US/UK Treaty, and the Maltese Treaty counts for nothing anyway as far as the "lump sum" is concerned.

I agree with your statement, "the biggest issue I see is whether the QROPS transfer is seen by the IRS as a taxable event or not."

theOAP

Sorry, the penny just dropped (and then I'll go to bed).

From the US/UK Tech. Expl. for para. 17.1, page 63 (the one George is depending on):

"While the term "pension" generally would include both periodic and lump-sum payments, paragraph 2 of the Article provides specific rules to deal with lump-sum payments, so they are not subject to the general rule of paragraph 1."

nun

Article 17 is significantly different in the Maltese treaty from the one in the UK treaty. However, I'm uncertain of the exclusion of tax on pension transfers due to a bipartisan US tax treaty when it is between two other countries.

theOAP

OK, I haven't gone to bed yet.

If we are talking solely of the pension, and disregard for the moment a taxable event, then:

1) If the pension is transferred to Malta "as whole", and the lump sum is then issued from a Malta pension, then the US/Malta Treaty applies.

2) If the lump sum is paid from the UK pension (UK source) as part of the transfer to Malta, IMHO the US/UK Treaty applies.

George keeps quoting 17.1, subparagraph (b) and 17.2 and "in the UK" in his statements. If in addition there is no 17.2 equivalent in the Malta Treaty, then he must be referring to the US/UK Treaty and treating the lump sum as if it were applicable under the US/UK Treaty. If so, I refer back to my quote in the previous post.