A) National Taxation of Pensions
- In Europe one often sees that due to the Reversal Rule by employer paid pension premiums are exempted from wages taxation. The own contribution is tax deductible. The pension annuity is taxed as of pension age. Taxation is therefore much later and often at a modest rate. If not all conditions are met, instant and total taxation including a stiff fine might materialize.
- Each country can have certain limitiations on these kind of tax benefits. For example Holland has a maximum amount of pension earning wages.
- Other countries have certain extentions of benefits:
- For example the UK has the Lump Sum possibility to receive the total DC pension capital at once as of 2015 and as of age 55.
- Furthermore the UK still has the 25% tax exemption.
- As well as the QROPS possibility to transfer UK pension capital from the UK to a recognized location without taxation.
- Expats who reside in Holland can apply for a 30% tax ruling. If granted they can i.e. receive 30% of their wages without tax. In general these 30% cannot be included in the pension earning wages. Only in specific instances it is allowed.
B) Double Taxation and Pensions
- I.e. the country where the retirering expat resides is entitled to tax regardless of nationality/origin of pension. Many exceptions (often for governmental pensions) do exist.
- It might prevent high tax claims by using international (mostly bilateral OESO based) double tax treaties and unilateral national regulations on double taxation.
- Double tax treaties don’t create the right to tax. They regulate which country may implement existing national tax law.
- Several countries like for example Holland have an extensive international network of bilateral double tax treaties. Use it to your advantage.
C) Tax Risks
Future Legal/Tax Regime?
No one knows what the rules will be in the future. Some countries, like for example The UK, have a tendency to change the pension related legislation and not always in favor of the person entitled to pensions. Please take this uncertainty into account when planning ahead.
Conflicting International Regimes?
Expats often have pension claims in several countries. One of the most relevant aspects of pension optimization is to make sure you use all tax benefits. In that regard each country has its own rules. As we have seen many times that national regimes can conflict in a serious manner, please take this into account when planning ahead.
For example: In Swiss certain pension pay-outs are Lump Sum based. Holland does not allow pension Lump Sum pay-out. Without additional attention this will result in the situation that a possibly substantial Swiss pension capital is not treated as such by Holland and could be taxed completely and up front at pay-out at a very high progressive tax rate.
Risk versus Ruling?
We sometimes hear from new clients that they know what a certain international tax situation constitutes as they have done their homework.
We always stick to our own approach which means that we do our own research and prevent not needed risks. Regarding international tax issues this means that we in general ask the National Tax Authority to in writing agree with our view on a certain matter.
D) Global Taxation Americans
A] Annual Tax Return
The United States is only one of two countries that enforce citizen-based taxation. Every U.S. Citizen and Green Card Holder must annually report worldwide income and foreign financial accounts to the IRS. This includes income from pensions and private annuities.
So U.S. Expats not only have to file taxes in their new country but need to also maintain their tax records in the U.S. Fines for non-compliance can be up to $10.000,- per year and jail time and there is no limitation period.
For the average American expat this means:
1) To file the annual income tax return if the annual income from work and assets exceeds rounded $ 9.500,-. Do the exact check yourself: https://www.irs.gov/help/ita/do-i-need-to-file-a-tax-return
2) A statement of non US bankaccounts (FBAR) in case the total of all these accounts amounts to more than $ 10.000,-.
Finally due to the Fatca legislation of 2010, every Amercian is also obliged to inform the US government about each financial account over which he has authority. This not from a tax but from a compliance angle in order to prevent illegal savings, money laundering and financing terrorism.
Feel free to ask which specialized and affordable US tax advisor we can recommend.
E) Expat Salary Split
An international salary split means that the wages are taxable in more than one country.
There are i.e. two different situations:
- The expat works not only in his residence country but also in another country for more than 183 days.
- Board Members with international responsibilities which is implemented by means of partially charging the wages to another intra concern company or by drafting a second employee contract.
A salary split can be very attractive for an expat and his employer if the related employee contract, payroll, tax, social security and pension issues are handled correctly.
If the expat works not only in his residence country but also in other countries,.this in general means that his global wages are taxable in his residence country and the wages related to working in other countries are also taxable in those countries.
The risk of double taxation is often (to some extent) prevented by international tax treaties and unilateral national tax regulations.
For the average expat is relevant to what extent he works in other countries than his residence country. This distinction is less relevant for Board Members as treaties often stipulate that the Board Member’s wages are taxable in the country in which the related company resides.
This makes the implementation of a salary split for such a Board Member less complex. Even though the split still has to acurately describe the actual situation. Which is often checked in a strict manner by national tax authorities.
If the salary split is attractive for the expat this is often caused by differences in progressive tax rates and tax free sums per country.
The conclusion is that if double taxation is totally prevented, then a salary split can be very interesting. Each situation has to be carefully checked to see if this is indeed the case. If not, a salary split might not be attractive at all.
In order to be able to compare the differences in State/Corporate/Private Pension Coverage between countries, you have to compare all pension essentials:
- Kind of systems
- Kind of plans
- Kind and amount of coverages
- Kind of tax treatment
- Maximum amount of tax benefits
- Amount of related costs
- Kind of investment possibilities
- National policy towards international transfer of value
- Mandatory or voluntary participation
- Extent of flexibilization possibilities
The optimization of the salary split position of the expat requires an indepth look at all relevant aspects. Beware of generalizations.
- Before retirement expats should have checked the tax situation of each pension claim.
- International optimalization of pension taxation is complex. It requires the advice from a specialist. It will be much cheaper than the cost of the lack thereof.