nun

Hayduk has a very informative website and here is a link to his thoughts on crossborder pension transfers.

Cross Border Retirement Schemes - QROPS and QNUPS

He is careful in his wording and would like more guidance from the IRS. He points to some IRS rulings that preserve tax deferral on pension transactions if the treaty country recognizes their tax free nature. But a transfer to a third country is the issue and without firm guidance from the IRS I think the logical leap that a cross-border QROPS is tax free is just that...a bit of a leap. I would not risk a QROPS just to get a tax free lump sum, and I certainly wouldn't transfer a UK plan that might have lower fees than a 5% front end load and 3% ongoing annual fees. If you have a UK pension I would look at the current terms and see if the new UK pension rules offer an opportunity to roll it over to a better plan in the UK. The QROPS companies are obviously going to come down on the US tax free side of the transfer, and they might well be right, but they have a vested interest and they have no risk, all the risk is on the owner of the pension.....so do you feel lucky?

MMcD

I agree completely with everything you say.
Well put!

JAJ

If a QROPS transfer has already been done, and a lump sum taken, the path of least resistance is likely to be to include properly on tax return, normally with a form 8833 to document the treaty claim. And include on FBAR/form 8938 as applicable. It would be important to complete the relevant information reports and tax treaty documentation to show that the QROPS transfer was done in good faith.

The IRS will then likely do one of three things:

1. Nothing; or
2. Disallow the tax free lump sum, but do nothing else; or
3. Open a more in-depth investigation into whether the entire QROPS transfer was a taxable event. Probably the least likely option, since it would involve a lot of IRS resource. Even if they managed to show the transfer was taxable in full, then the future income stream would not be U.S. taxable.

On the basis that QROPS transaction is already complete, it is probably not worth spending thousands of dollars on legal advice at this stage. But it would be worthwhile to consider what would be the plan if either of scenario 2 or 3 transpired. Path of least resistance would be to pay the tax. It would be wise to keep a reserve of funds available to pay any extra tax, at least while the statute of limitations is open.

nun

Good advice. I think the treaty claim for the tax free 30% lump-sum is ok, the tricker bit is how to handle the QROPS transfer....should it's non taxable nature be actively claimed on an 8833? Doing that might prompt the IRS to look a little closer, but it's hard to know just how probable that might be. I think there's a good chance that nothing will happen, but do the potential consequences of an audit where the required disclosure documents were not filed make the risk worth it?

One small point, if tax were to be paid on the QROPS transfer a large US tax free basis would be created, but there would still be US tax to pay on the part of any future income due to investment gains after the transfer.

JAJ

The difference is that a lump sum distribution from a pension fund is prima facie a taxable event and therefore a form 8833 should be filed to show a proper exemption under the tax treaty. Despite all the forum discussions/speculation, the pension transfer itself is not definitively a taxable event and it would seem inadvisable to file a form that admits to such. The IRS might wish to pursue the matter (with an additional tax assessment) but then again, and perhaps more likely, they may not.

nun

The discussion so far has emphasized the uncertainty in the tax status of the QROPS transfer. If you are going with the QROPS company opinion that it is not taxable it requires the application of US tax treaties as transfer or a UK plan recognized under the US treaty to a plan not recognized by a US treaty is certainly a taxable event....so the question is whether an 8833 claiming tax treaty exemption for the transfer is required or advisable. If you are convinced of the tax free status of a QROPS transfer I'd file an 8833 and then if you are audited you have documentation that the transfer was done in good faith. If audited, failure to file an 8833 or other disclosure documents might be interpreted as a deliberate effort at evasion.

nun

If a QROPS transfer is made the UK pension administrator files this form with HMRC.

http://www.hmrc.gov.uk/pensionschemes/apss-262.pdf

I wonder if HMRC will share information with the IRS if there is evidence of US citizenship or residency on the form?

kansanbrit

But the regulations state that 8833 reporting requirement is waived if the treaty reduces or modifies income derived from pensions.......

I found this IRS doc today regarding TFLS ....

http://www.irs.gov/pub/irs-utl/am2008009.pdf

which is pretty clear cut as far as the UK treaty goes but I think helps the Maltese treaty.

nun

That letter just explains the application of the US/UK tax treaty, its all well known. In fact that letter argues that a UK pension transfer to a US pension would not be protected by the treaty and would be taxable in the US because the transfer is not to a UK pension plan. The uncertainty with the QROPS comes from it being a transfer to a third party, ie. Malta, and that is not covered by either the UK or Maltese treaty. As the UK treaty only protects the transfer of a UK pension to another UK pension the IRS interpretation of the QROPS is not known, but these IRS letters

http://www.irs.gov/pub/irs-wd/11-0096.pdf
http://www.irs.gov/pub/irs-wd/10-0151.pdf

as well as the link to the letter you give certainly raise the possibility that the IRS would see any QROPS transfer as a taxable event. I am not convinced by the arguments I got from the QROPS companies and I would hope that they'd get an IRS ruling on the matter, but that's not really in their interest while people are doing QROPS.

Generally the 8833 is not required when income from a pension is involved and to be frank I don't think 8833 is applicable for a QROPS because it is between the UK and Malta.....I don't think the transfer is protected by a treaty, but FBAR and 8938 and possibly foreign trust forms depending on the Maltese pension structure should be filed. I agree with the conclusions of the IRS letters that:

The QROPS company I emailed wrote that they'd never heard of the IRS questioning a QROPS, but that might well have been at a time of lax enforcement, or they just might not notice anything. Anyway when you file you should be ready to defend any position you take just in case you get audited, particularly an unusual one like a QROPS or a large tax free pension payment.

gchapman310

OK I have been following this with gloom, as I have been anticipating my UK pension beginning next uyear and had resigned myself to either mising out on a "tax Free lump sum" or paying US Tax (I am a US Resident) on it.

Today I found this little gem..

http://www.treasury.gov/resource-cen...ts/teus-uk.pdf

This comes from the "Technical Explanation of Tax Treaties" as published by the Treasury. This talks about the lump sum distributions and the (poorly defined) exemption from being included. It clearly identifies the specifics - arguing that (since as previously pointed out, lump sum in the US usually means the entire value, whilst in the UK this is NOT the case) a US Citizen with a potentially large ROTH or 401K payout could become a UK resident for a year and take this distribution tax free- clearly not the intent. The provision and exclusion now dictate that such distributions are ONLY taxable in the source country.

In the scenario described obviously a US citizen could not avoid the taxation on his distribution (since the US would be the source and the appropriate tax rate would apply)- however, using the same logic a distribution from a UK pension scheme is only taxable in the UK. Since a qualifying lump sum would be taxed at 0% this would be the rate applied. Double taxation would prevent this from being in the US also.

ANyone have any comments or thoughts?

Pulaski

Aren't you just getting a 0% credit against US taxes? I don't see how getting "taxed" at 0% gives you immunity to US taxes.

nun

You have neglected the Saving Clause which allows the US to tax the lump-sum distribution.

A better approach would be to try to exploit the "poor definition of a lump-sum". If the UK 25% tax free payout could be seen as just income and coming under Article 17, para 1, then as it's tax free in the UK, it would also be tax free in the US. In the US a lump-sum payment usually refers to the entire balance of a pension or account. Also the UK now allows for the 25% tax free payment to be as a series of payments over a number of years....that doesn't sound like a lump-sum as the IRS defines it.

gchapman310

The whole scenario of the tax free lump sum (UK definition - 25% of value) just seems to go round in circles. It seems to me the key point is would the event be considered as falling within article 17.1 or 17.2?

The Technical Explanation I referred to seems to be pretty clearly delineating the intent, that is to avoid the opportunity for a recepient of a US fund taking UK residency for a short period in order to avoid tax free distribution of the whole value.

I would have thought the event of a US Resident/UK Citizen taking a 25% or less lump sum has happened numerous times - is there any information anywhere on how the IRS has interpreted this - particularly when the distribution is properly claimed using the 8833?

JAJ

It seems clear to me that article 17.2 overrides 17.1, and that the Savings Clause applies to 17.2. But if you wish to understand the issue better, you may consider a consultation with a tax attorney.

nun

Tax free pension income in one country is also tax free in the other, for example a ROTH is tax free in the US and the UK. So all you have to do is convince yourself and the IRS that the 25% tax free payment....or better still a stream of payments....from a UK pension is an income payment rather than a lump-sum. As the IRS definition of a lump sum is usually the entire value of a pension you might be successful. If HMRC was to start calling the 25% tax free payment a "distribution" rather than a "lump sum" would it change things?