I just joined this forum and made a comment on a thread about withdrawing pension funds to transfer to to the USA for reinvesting as I was wary that UK Sipp pensions are not exempt from PFIC reporting if such funds are invested.

So I'm starting this thread to get some clarity on this matter. I have not used any tax advisor as my initial interaction with some of them has not proved useful and they are wanting to charge unreal fees and some had less knowledge than me when I started asking detailed questions.

So I did my own research and came to my own conclusions in that this is still a gray area in the USA and is not a black and white clear cut situation..

A lot of folks say that UK Sipp Pensions are protected from PFIC reporting for as they are under the umbrella of a pension fund under the dual US UK tax treaty and as.such exempt.

However, reading the actual IRS documents I came to the conclusion that this is not clear cut. I used AI to summarize my findings as follows.

UK SIPPs are not recognized as “qualified” individual retirement plans under U.S. tax law because they do not meet the criteria set forth in the Internal Revenue Code (IRC) Section 408 or 401. Here’s how this classification arises and what it means: --- 🧾 Why UK SIPPs Aren’t Recognized as U.S. Individual Retirement Plans - U.S. Definition of Retirement Plans: Under the Internal Revenue Code, retirement plans like IRAs and 401(k)s must meet strict requirements regarding contribution limits, tax treatment, and plan structure. These are defined primarily in IRC Sections 401 and 408. - Foreign Plans Must Qualify: For a foreign pension to be treated as a tax-deferred retirement plan in the U.S., it must either: - Be explicitly recognized under a bilateral tax treaty, or - Qualify under IRC rules, which most foreign plans do not. - UK SIPPs Lack U.S. Qualification: SIPPs are self-directed UK pension schemes. While they resemble IRAs in structure, they: - Are not listed in IRC 401 or 408. - Do not meet U.S. trust and plan qualification rules. - Are not treated as “qualified plans” under the U.S.–UK tax treaty unless they are employer-sponsored and meet specific treaty conditions. - Tax Treaty Limitations: The U.S.–UK Tax Treaty (Article 17 and Article 18) provides limited recognition for pensions. Employer-sponsored pensions may qualify for deferral, but personal SIPPs typically do not. This means: - Contributions to SIPPs are not tax-deferred in the U.S. - Growth inside the SIPP may be taxable annually under PFIC or foreign trust rules. - Distributions may be taxed differently than U.S. retirement accounts. --- ⚠️ Implications for U.S. Taxpayers with UK SIPPs - Annual Reporting: SIPPs may trigger Form 3520/3520-A (foreign trust), FBAR, and Form 8938 (FATCA).- PFIC Exposure: If the SIPP holds non-U.S. mutual funds, it may be subject to Passive Foreign Investment Company (PFIC) rules.- No Roth Treatment: SIPPs cannot be treated as Roth IRAs or benefit from U.S. Roth conversion rules.
I'd like to understand why people believe they are exempted given the above? As I've just joined this forum and haven't posted enough sending private messages to me can't be read at the moment.

If the amount in SIPP exceeds threholds for FBAR, and Form 8938 (FATCA) at any time of the year, it must be reported as such when filing tax return.

It is the overwhelming consensus of tax advisers and financial advisors that UK pensions are not subject to PFIC. The only tax advisors I have ever come across stating it is had also seemingly based their rationale on little more than them just wanting to manipulate people to pay them lots of fees to set up and manage an incredibly complex arrangement that all their competitors will tell you is contrived nonsense.

There is zero evidence of any US taxpayer with a UK pension, including a SIPP, ever running into PFIC issues with the IRS. Retail investors are not even allowed to own US domiciled funds inside a UK pension either, as violate MiFiD II disclosure laws. Hence, why Vanguard/BlackRock etc have to have Ireland domiciled versions of all their large US based ETF's, so that UK/EU residents can purchase them, as they can't buy the US versions.

🔹 Why UK Pensions (including SIPPs) Are Not Subject to PFIC Rules

1. PFIC Rules Apply to Directly Held Foreign Investment Companies

PFIC (“Passive Foreign Investment Company”) rules under IRC §§1291–1298 are designed to penalize US taxpayers who hold shares in non-US corporations that earn primarily passive income (interest, dividends, capital gains).

However, these rules apply only when the taxpayer directly or indirectly owns shares in the foreign corporation.

A pension plan (such as a UK SIPP, occupational scheme, or personal pension) is treated differently — you are the beneficiary, not the shareholder.

2. UK Pensions Are “Foreign Trusts” or “Pension Funds,” Not Corporations

For US tax purposes, UK pension schemes are generally classified as foreign grantor trusts (if individually funded, like a SIPP) or foreign employees’ trusts (if employer-funded).

• You do not own shares in the mutual funds or ETFs inside the pension;
  
• Instead, the trust or pension administrator owns those assets.
  

Since PFIC attribution rules apply to ownership of stock in foreign corporations, they do not “look through” to the individual when held inside a bona fide pension trust.

3. Tax Treaty Protection under the UK-US Double Taxation Convention

The UK-US Double Taxation Convention (Article 18 & Article 19) recognises each country’s qualified pension plans as tax-advantaged vehicles.

Key points:

• Article 18(1): “Pensions and other similar remuneration” arising in one state and paid to a resident of the other are taxable only in that other state.
  
• Article 18(5): Contributions to a pension plan recognised for tax purposes in one country are also tax-deferred in the other, provided certain conditions are met.
  

The IRS therefore respects UK-recognised pensions (including SIPPs) as legitimate pension arrangements, not investment accounts.

That treaty recognition overrides the PFIC regime, as the PFIC rules are anti-deferral provisions that cannot apply to treaty-protected pension deferral.

4. IRS Consistency and Practice

While there’s no single IRS ruling specifically naming SIPPs, several consistent IRS and tax-court positions reinforce this:

• Revenue Ruling 2008-40 confirms that foreign pension plans can be tax-deferred if recognised by treaty.
  
• PLRs (Private Letter Rulings) and consistent practitioner consensus hold that UK personal pensions and SIPPs are “foreign pension trusts” under IRC §402(b).
  
• PFIC reporting (Form 8621) is therefore not required for funds held within these recognised pension structures.
  

5. When PFIC Rules Can Apply

PFIC rules do apply if:

• A US person holds foreign funds or ETFs outside a pension (e.g., in a GIA, ISA, or offshore bond); or
  
• A pension wrapper is not recognised as a bona fide retirement arrangement (for example, certain unapproved QROPS or personal investment accounts mislabelled as pensions).
  

So the key distinction is whether the wrapper itself is a recognised foreign pension plan under treaty or domestic law.

Thanks for replying and formatting your response correctly as opposed to mine!

In total agreement with your opening paragraph regarding manipulation in order to make money which is why I'm here. So now onto some points for clarification.

1. The point I was concerned about was the indirect ownership of pfic shares. I was reading that I was the investor since I managed the Sipp. However, you are saying the UK sipp provider is the manager of the Sipp as they are the ones who end of buying the shares on your behalf and you are then the beneficiary.

2. Also came to the same conclusion that UK sipps are generally viewed as foreign trusts but with the section 17 guidelines in 2020 no 3520 form is needed as UK sipp pensions are exempt as they meet the definition of a US tax favored foreign trust.

3. This is where it gets a little gray. Under the tax treaty of section 17 and 18, my research says only employer sponsored plans are qualified which goes to the final point you made in 5 regarding is the wrapper a bona fide qualified plan.

4. I have no comment on that as I'm not contributing anymore, just wanting to withdraw.

5. And yep, this seems to be the crux of the matter regarding whether the wrapper is bona fide. However, as you say,, if there have been zero cases investigated by the IRS where UK Sipps and the PFIC funds invested haven't raised any eyebrows that alone makes me feel a little easier. It would be great if there were cases though as that would certainly give a precedence.

Thanks for your views on this and this discussion as I'm sure many people may either not know about this at all or are getting blindsided by advisors.

The issues with owning PFICs are the onerous reporting requirements of Form 8621, and the punitive taxation. The UK US tax treaty protects all growth within a UK pension plan from IRS tax until it is withdrawn. SIPP withdrawals are always in cash after the underlying investments have been sold. That cash is then taxed as ordinary income. Therefore the punitive PFIC taxation does not apply.

With regard to Form 8621 an owner of a foreign pension fund is not required to complete Part 1. That still leaves Part 5, the onerous part. However the whole point of Part 5 is to calculate the PFIC taxes due, and since there are no PFIC taxes due to the tax treaty taking precedence, it is a pointless exercise. In any case there are no fines or penalties for failing to file Form 8621.

Both of the above mean that there is no issue with holding PFICs within a SIPP. That said, there are substantial penalties and fines for failing to report foreign income and pay the appropriate tax. Failing to report PFICs held in any form other than a UK pension plan, and pay the PFIC tax due would incur those penalties and as such there are significant consequences for not filing Form 8621.

Of course, the SIPP must be reported on an FBAR and Form 8938 as appropriate. With regard to the need for Form 3520, Rev. Proc 2020-17, issued by the IRS pretty much clarified that is not required so long as it is appropriately reported on an FBAR and Form 8938

If you are looking for a cast iron statement from the IRS in relation to UK SIPPs you will never get that. Everything is generalized and you have to interpret. Their actions speak louder than words, and the lack of action applying any kind of PFIC taxation to SIPPs, or failing to report them on Form 3520 speaks volumes.

As frequently stated beware anyone who stands to gain financially from advising otherwise. Many “professionals” prey on the ambiguity provided by IRS generalizations.

Thanks for that Glasgow Girl, I'm actually a Glasgow boy!

So this makes my life much easier if I decide to invest. So if I invest in the funds which are PFIC but exempt under this pension provision then when the funds are sold they are still within the pension umbrella and I just see the cash withdrawal from the pension and just report this as foreign pension income on my 1040. No need to report any of the individual pfic fund sales.

Now I just need to find a simpler way to reclaim UK tax witheld without waiting ng for year end and filing a sa100 and sa109. Hoping form R43 addresses that issue. I have posed that question to HMRC and am awaiting a response. But that will be for another thread.

First, generally agree with everything jlaws states. Good information provided, Some additional clarification on your response,

(1) It does not matter who manages the assets. UK SIPPs are regarded by the IRS as a Foreign Grantor Trust, and such trusts are treated as pass through entities meaning that the trust owner is responsible for paying taxes, including PFIC taxes. In the eyes of the IRS (and that is all that matters) you are the trust owner (as well as the beneficiary) and responsible for all taxes due. Fortunately, any UK approved SIPP is also a foreign pension and due to the UK US tax treaty no tax is due until funds are withdrawn and then taxed as ordinary income, so that is a moot point.

(2) A SIPP is indeed a Foreign Grantor Trust. Rev. Proc 2020-17, issued by the IRS pretty much clarified that Form 3520 is not required so long as it is reported as appropriate on an FBAR and Form 8938.

(3) Article 18, Para 1, states that all UK pensions are only taxed when funds are paid. It does. It is not restricted to employer sponsored plans only. Not sure how you are drawing that conclusion.

(4) Growth within foreign pension plans is tax deferred until withdrawal, however contributions made whilst subject to US taxation are not tax exempt. Does not matter to you since you are only concerned about withdrawing.

(5) If a SIPP is recognized by the UK as pension plan, then the IRS recognizes it as a foreign pension with all the tax treaty benefits. The only issue is to be sure that the UK recognizes any particular SIPP as a pension plan.

Correct. Simply report SIPP withdrawals as Ordinary Income. Technically you should create a substitute 1099-R and report that way, but many (most?) report as Other Income and no one cares because the tax due is the same either way.

An alternate to reclaiming on Form R43 if that does not work out is to go back to the NT code. Take a small withdrawal to include income versus a lump sum only from your SIPP. I withdrew a very small amount, classified 25% as a (UK tax free) lump sum and the remainder as taxable income which was (UK) tax free because it was below the 1257L emergency code. That was the key to getting the NT tax code approved. You will want that going forward anyway. IIRC the NT process allows you to claim any UK tax paid other than for lump sums. Note that HMRC will not refund any tax paid on a lump sum because the tax treaty allows them first dibs on that. You will have to claim a foreign tax credit with the IRS using Form 1116.

Thanks again. Interestingly though I did the same as you. I took the 25% UK tax free withdrew 100 pounds as income to get a pay slip. Waited 3 months to get the form 6166 from the IRS and then sent.that to HMRC to get an NT tax code for the remainder of my pension withdrawls together with the DT individual form. However HMRC rejected my claim saying that since it was a flexible drawdown and not regular payments like an annuity no NT tax code could be granted and told me I would have to claim back any tax on subsequent withdrawls above my 1257L tax code they assigned. This happened last week. Not sure if you have regular payments setup or are always under the personal allowance for the year.

The reference to only UK Sipp employer sponsored qualified plans qualify was from deep dive AI searching. However, I think this is now mute from the above discussions

I'm feeling much more comfortable in investing now with my UK SIPP but still need to draw above my allowance each year so we will see what happens with HMRC and R43.

My understanding (from talking directly to HMRC) is that to receive an NT tax code, US Form DT2002 has to be received directly from the IRS. The usual process is to submit the US version of the DT2002 (and it must be that version) with Form 6166 to the IRS, who then stamp it and forward onto HMRC. I had an issue where for some reason the IRS erroneously sent it to back to me instead of forwarding to HMRC. I asked HMRC if they would accept the form if I forwarded onto them, and they said no it would be an automatic rejection unless received directly from the IRS. I then contacted the IRS who were very helpful in resolving the issue, by having me fax them a new copy of the DT2002 which they stamped and immediately forwarded to HMRC, who issued my NT code a few weeks later.

I would go through the process again this time including the US DT2002 when you submit Form 6166 to the IRS. I have had a single withdrawal, also of £100 purely so that I could get the NT code. My SIPP provider asked me to categorize the withdrawal. I stated £25 tax free lump sum and the remaining £75 as income. If you don’t have the option to categorize the withdrawal as lump sum and/or income, I would take a monthly withdrawal of the same small amount for a few months to establish an income pattern. Then go back through the NT process. In the long run that is going to be more convenient than claiming back every year, unless you have single fund and no other pension and intend to withdraw all in one go.

Interesting. I'm still awaiting for the actual letter from HMRC stating the rejection but the person I spoke to on the phone read it out from the notes. They didn't reject it because it came from me rather that the withdrawls were going to be in an adhoc basis. I'm going to call them back up and question that ruling. There were changes in April 25 regarding withdrawls from flexible pensions but I can't see any which would negate getting an NT tax code .

Thanks for letting me know you have an NT code for a flexible drawdown account.. I'll also contact a relative who works for HMRC to see if he can find out more.

Just off the phone with HMRC and got the NT tax code also sorted out. Spoke to a double taxation specialist. All they needed to know was that I would be drawing amounts from the pension on a regular basis. I gave an annual figure and they modified my code for my UK sipp to now be NT for the next withdrawl.

Thanks to all comments for helping me get the PFIC issue laid to rest and also my NT code.

Well done, it has been many years since I was in a similar position but I still remember how good it felt when that NT code was applied.

Reading all the relevant and very useful posts, this all leads me to believe that I can convert my current contract-based workplace pension I have with Standard Life (GFRP to be precise) to an International SIPP, and assuming no further contributions to that SIPP I am not going to be subject to 3520 / 3520-A reporting to the IRS going forward. My Standard Life pension was a defined-contribution type and viewed as an 'employment trust', with 100% contribution made by my former employer in the UK. Thanks

That would be my reading too. I'm sure Glasgow girl and JLaw will also probably confirm that too. So my thankful for finding this forum.

Cheers
Iain