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) Double Taxation and Domicile Versus Residence
When you live in country A and will receive pension pay-out from country B, you have the risk of double taxation. The home country will in general tax all global income but the country at source might also tax.
In general this risk is reduced or prevented by Double Tax Treaties which stipulate which State has the right to tax and implement its already existing national tax law. For these kind of treaties the difference between ‘Domicile’ and ‘Residence’ is relevant.
We will now explain the details.
Domicile is the country in which a person has his official and permanent home. Or with which country he has a substantial social/family/financial connection.
Several countries have know the ‘Deemed Domicile’ status. This means that even though a person did not live in that country, under certain circumstances their national tax authority can act as if that person did live in that country during a certain period. For example regarding inheritance tax when a person passed away.
‘Domicile of Choice’ means that as of a certain age, everyone has the ability to if so desired change his domicile.
A person will be treated as a tax resident in case he stays in that country for at least 183 days per tax year. For example if an Expat working on a project stays for a longer period in another country.
Domicile and Residence
It is possible that an Expat has domicile in one country but is also resident in another country. These kind of situations are mentioned in the OECD Model Tax Treaty. Which is the basis for most Double Tax Treaties.
The OECD Model Tax Treaty mentiones that an individual has domicile in the State in which he has the availability of a permanent home.
If the individual has a permanent home available in neither State, he is considered to have domicile in the State in which he normally lives.
If the individual normally lives in both States and he has availability of a permanent home in both States, he is considered to have domicile in the State with which he has the strongest personal and economic ties.
When the State with which he has his strongest personal and economic ties cannot be determined, he has domicile in the State of which he is a national.
Finally please note that not all Double Tax Treaties include the OECD standard approach. Thus it is always advisable to check the applicable clauses..
D) Split Tax Year
A] Regular Tax Year
Most countries start the new tax year as of January 1st.
Only The UK start their new tax year as of April 4th.
B] Split Tax Year
As Expats often start new employment during the year, they will often meet the situation of having income in country A in the first part of the year and likewise in country B during the second part of the year.
C] Tax Object: Domicile Versus Residential Taxation
The switch in country where the Expat lives often changes his taxation.
Certain tax benefits are only included for people who have their domicile in the country.
Furthermore only the domicile country will tax the global income.
D] Correct Tax Return
If you as Expat have a split tax year in two countries, please make sure you use the correct Income Tax Return Form in each country.
E) 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.
F) 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.
G) 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.
H) Dutch Income Tax Calculator
I) Temporary Dutch Tax Exemption
Persons who live for example in the UK and (will) receive Dutch State and/or Corporate and/or Private Pension pay-out, face in general taxation both in The UK and at source in The Netherlands. In order to prevent this, it is possible to request an exemption from Dutch Withholding Tax.
If you fill-out the correct form* and include a formal statement from your residential tax authority stating that you fall under the realm of that national income tax regime, then you might receive the Dutch exemption.
Please be aware that this exemption is in general only valid for a period of 5 years and that it is up to you to in time request a new exemption. The exact end date of the provided exemption is mentioned in the written tax ruling. It seems advisable to request the new exemption six months before that date.
Finally if your circumstances might change during the provided exemption, you have the legal obligation to notify the Dutch Tax Authority.
* This English form including an English explanation is enclosed on our website under the directory: News/Brochures/Forms.
- 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.