How do retirement plans work

Art. 18A USA. Art. 18A 1 Retirement benefit plans

Transcript

1 Art. 18A USA Art. 18A 1 Retirement benefit plans (1) If a natural person resident in a Contracting State participates in or beneficiaries of a retirement benefit plan set up in the other Contracting State, the income generated under the plan can only be taxed as this person's income if and to the extent that they are paid to or for the benefit of that person under this plan (and are not transferred to another plan in the other Contracting State). The relief to be granted under this paragraph may not exceed the relief that would be granted by the other state to persons resident there for contributions to pension plans established in that state or for entitlements acquired under pension plans established in that state. The competent authorities of the Contracting States shall determine the discharge to be granted under this paragraph in accordance with the preceding sentence. (3) Paragraph 2 only applies if a) contributions were paid by the natural person or for the natural person or by or for the natural person's employer before the person began to work in the other country, and b) the The competent authority of this state has determined that the pension plan generally corresponds to a pension plan that is recognized as such for tax purposes in this state. (4) The term retirement plan means an institution in a State Party whose primary function is to administer and grant retirement benefits or to generate income for the benefit of one or more such institutions. 1 Art. 18A inserted by amendment protocol. v (Federal Law Gazette II p. 1186). EL 107 May 2009 Eimermann 1

2 USA Art. This paragraph only applies if tax relief is granted for the contributions or claims in the Federal Republic of Germany. b) The relief under this paragraph shall not exceed the relief that would be granted by United States residents in respect of contributions to, or entitlements earned under, any generally comparable retirement plan established in the United States. c) For the purpose of determining whether an individual is entitled to participate in a pension plan established in the United States and to receive tax breaks with regard to such a plan, contributions made to a pension plan established in the Federal Republic of Germany or acquired under such a pension plan shall apply Entitlements as contributions or entitlements under a generally comparable retirement plan established in the United States to the extent that the individual is granted relief under this paragraph. d) This paragraph applies only if the appropriate US authority has confirmed that the retirement plan is generally equivalent to a retirement plan established in the United States. Protocol No. 16 to Art. 18A Paragraph 4 (Retirement benefit plans) a) For the purposes of Article 18A Paragraph 4, the term retirement benefit plan includes the following plans and plans of the same or a similar type that are established on the basis of legal provisions enacted after this Protocol has been signed: 2 Bucket man May 2009 EL 107

3 Pension plans Art. 18A USA aa) In the case of the United States, qualified plans according to 401 (a) Internal Revenue Code, individual pension plans (including individual pension plans that are part of a simplified employee pension plan) according to 408 ( k) are, individual retirement accounts, individual retirement annuities and plans (accounts) according to 408 (p) and Roth IRAs according to 408A), tax-recognized pension plans (qualified annuity plans) according to 403 (a) , Plans under 403 (b) and governmental plans under 457 (b). bb) In the case of the Federal Republic of Germany, pension plans within the meaning of 1 of the Company Pension Act. b) For the purposes of Article 18A paragraph 3 letter b and paragraph 5 letter d, the following applies: aa) The Federal Republic of Germany recognizes the tax-approved pension plans listed separately in letter a, double letters aa, which are not Roth-Individual Retirement Accounts (IRAs) acts as old-age pension plans that correspond to the old-age pension plans mentioned in 1 of the Company Pension Act. The Federal Republic of Germany grants the corresponding tax exemption according to 3 No. 63 of the Income Tax Act; and bb) the United States recognizes retirement benefit plans within the meaning of 1 of the Company Pensions Act as retirement benefit plans corresponding to those referred to in letter a, double letter aa. Editor: Dieter Eimermann Overview margin no. I. General Content and structure of the regulation ... 1, 2 2. Personal scope of application Deviations from the model agreement II. Paragraph Competitions Resident as participant or beneficiary of a pension plan No allocation of income from the pension plan III. Paragraph General Eligibility requirements Contributions to the pension plan Increasing entitlements Contributions and deduction of operating expenses Relief to be granted EL 107 May 2009 Eimermann 3

4 USA Art. 18A 1 Income / assets margin no. IV. Paragraph Existence of the old-age pension plan Recognition of the old-age pension plan V. Paragraph General old-age pension plan Name of the old-age pension plans VI. Paragraph Content of the regulation Scope VII. Effects of the Saving Clause Literature: Briese transfer of pension entitlements and pension obligations to a pension fund, DB 2006, 2424; Buttler Tax Restrictions in Structuring Company Pension Plans for International Postings, BB 1998, 1132; Doetsch Company Pensions in the USA, RIW 1988, 614; Endres / Jacob / Gohr / Klein DBA Germany / USA, Munich 2009; Endres / Wolff sample cases on the revised German-American double taxation agreement, IStR 2006, 721; Gerhard Fischer Insolvency insurance for partial retirement, working time accounts and retirement provision, asset coverage with double-sided trust in practice, DB 2001, 21, Beil. 5; Benno Fischer Company pensions in international tax law using the example of US pension commitments, Cologne 2001; Haase International Taxation Problems of Multinational Employee Transfers, Tax Planning International Review, 2005, 28; Harder-Buschner General Tax Law Conditions for Company Pension Plans at a Glance, NWB F. 3,; Harder-Buschner Current legal status of company pension schemes, NWB F. 3,; Hartrott company pensions in international tax law using the example of US pension commitments, Cologne 2001; Helmreich The company pension scheme, NWB F. 26, 4361; Klemm Are contractual trust arrangements subject to the restrictions of the EU Pension Fund Directive ?, DStR 2004, 613; Lühn Introduction of a new Art. 18 a DBA USA for old-age pension plans, IWB F. 8 Gr.2, 1495; Scheffler / Kölbl Taxation of company pension schemes at the employee level in an international context, IStR 2007, 113; Schmidt Tax deduction of contributions to old-age provision according to the new DBA-USA, Praxis internationale Steuerberatung 10/2006 p. 265; Wellisch taxation of company pension schemes with cross-border employee posting, StuW 2003, 154; Wolff / Eimermann Innovations in the DBA-USA: Amendment protocol from June 1, 2006 to the DBA-USA 1989 and the protocol to it, IStR 2006, 837. Administrative instructions: Germany: BMF v IV C 4 S / 03, BStBl. I 2003, 383; BMF v IV C 4 S / 04, BStBl. I 2004, United States: Treas.Reg,; 1.409A-1 to 1.409A-6. I. General 1. Content and structure of provision 1 a) Retirement provision. The forms of operational Retirement provision and the associated taxation concepts are diverse and internally not coordinated. The cross-border staffing 4 Eimermann May 2009 EL 107

5 Retirement plans 2 Art. 18A USA make it much more difficult and make it more difficult. lead, if contributions to a foreign. Pension plan for tax are not deductible or are treated as a taxable wage and the later benefits are also fully taxable (cf. Art. 18 No. 31 ff. MK). For the first time, Art. 18A is a regulation in a from Dtl. A concluded agreement through which the contracting states grant the same tax breaks for contributions to pension plans that have been set up in the other contracting state as for plans that have been set up in their own state. Since the purpose of the regulation is to facilitate the cross-border posting of personnel, it does not apply in general to contributions to old-age provision, but only to contributions to company pension plans and to plans through which self-employed people build up their old-age provision. Art. 18A not only regulates the tax treatment of contributions for employers and employees; it also extends to the inventory of the growing entitlements, including the investment income, which are achieved from investing the contributions before the pension is drawn. The provision does not regulate any delimitation of the taxation rights between the contracting states; the corresponding provisions for the qualifying phase (Art. 15 and, if applicable, Art. 7) and for the payment phase (Art. 18) remain unaffected; Rather, it expands the domestic Law of the contracting states against the background that both states are taxing the development of the company pension scheme. and tax the later retirement income (in Germany after the end of the transition period extending into 2040) as a rule in full (principle of downstream taxation). Paragraphs 2 to 4 are essentially based on a proposal by the OECD (cf. Art. 18 No. 37 MK; MA Art. 18 No. 6). Art. 18 US MA 2006 contains a largely comparable regulation as does Art. 18 of the US-UK DTA from b) Structure of the regulation. Paragraph 1 relates to the attribution of the income that a pension plan generates from investing the contributions received and the date on which it is taxed. Paragraphs 2 and 3 regulate the taxation for the country of activity. Treatment of both the contributions to pension plans that exist in the other country and the increasing entitlements. In accordance with Art. 18 No. 36 MK, they regulate the extent to which the pension plans of both countries are to be regarded as equivalent and limit the tax breaks for contributions in accordance with their respective laws. In addition to this, Prot. No. 16 letter b designates the plans for which equivalence is deemed to have been established. Paragraph 4 provides a definition of the term retirement benefit plan. To this end, Prot. No. 16 (a) contains an enumeration of the plans of both contracting states that currently meet the definition in paragraph 4. Paragraph 5 regulates special features that apply to US citizens living in Dtl. are resident, work here and for whom there is a pension plan in Germany. This section is only relevant for the USA. EL 107 May 2009 Eimermann 5 2

6 USA Art. 18A 3 9 Income / assets 3 4 5, 6 2. Personal scope Natural persons. Among the personal The scope of Article 18A naturally falls. Persons in their capacity as employees or self-employed. Other natural and not natural Persons are affected to the extent that, in their capacity as employers, they are entitled to deduct contributions made in favor of the employee as operating expenses. The provision only applies to persons who are resident in a contracting state (Art. 1). 3. Deviations from the model agreement No regulation. The MA does not contain any comparable regulation. However, the question of tax. Treatment of contributions to foreign Pension funds are discussed in detail in Art. 18 No. 31 ff. MK, and proposals are made for provisions of the agreement that are intended to enable tax-privileged contributions to pension funds in the other country (Art. 18 No. 37, 38 MK). temporarily free II. Paragraph 1 1. Competitions 7 Demarcation from Paragraphs 2 and 3. Paragraph 1 is detached from the application of Paragraphs 2 and 3. In particular, it is not required that the requirements of Paragraph 2 are met at the same time. For the application of Paragraph 1, it is only important that the pension plan meets the requirements of Paragraph 4 in conjunction with. Prot. No. 16 letter a fulfilled Resident as participant or beneficiary of a pension plan a) Resident. The term refers to people who are isd. Art. 4 para. 1 or 2 are deemed to be resident in a contracting state. b) Participant or beneficiary. The distinction between the terms participant and beneficiary of a pension plan is not of fundamental importance. It is essential that a person has regularly received a benefit commitment on the basis of an employment relationship as part of a pension plan. The term participant (member, participant) refers to this person. She will usually also be the beneficiary. However, beneficiaries can also be the surviving dependents of the participant, e.g. if the participant dies before benefits from the plan are due. In cases of direct insurance, for example, one will speak more of the beneficiary than of the participant in a pension plan. 6 Bucket Man May 2009 EL 107

7 Retirement benefit plans Art. 18A USA c) Retirement benefit plan established in a contracting state. The pension plan must be established in one of the contracting states. For the purposes of paragraph 1, this is the contracting state that is not the state of residence of the participant or beneficiary. 3. No attribution of the income from the pension plan Non-taxation. Paragraph 1 prohibits the country of residence from assigning the income that the pension plan generates from investing the contributions to the participant or beneficiary as taxable income at the time it is earned. The determination of this income is only permitted if it accrues to the participant or beneficiary; regularly as part of the services to be provided after the insured event occurs. Without this provision it would be conceivable that according to the tax law. Regulations of the country of residence Income of the pension fund is to be attributed to the participant or beneficiary as taxable income, e.g. because he does not recognize the pension plan or pension fund set up in the other contracting state or, as for example in Germany, regards it as an investment fund, to the 6 InvStG, if applicable is to be applied. The prohibition on assigning the plan's income to the participant or beneficiary as taxable income prior to the point in time at which benefits are to be provided from the plan also applies in the event that the plan is transferred to another pension plan, e.g. as a result of Takeover of a company by another company (cf. Art. 18 No. 54 MK). This presupposes that the pension plan to which the obligation is transferred meets the requirements of a plan under Paragraph 4 and was set up in the same contracting state as the issuing plan. Since Paragraph 1 only relates to the income from the plan, other tax consequences that may arise from a transfer remain unaffected (see e.g. Briese DB 2006, 2424). The prohibition of taxation, however, does not extend to the pension plan (the pension fund) itself. Art. 18 No. 69 MK proposes a provision according to which the contracting states recognize the tax exemption of their pension funds for the income of these institutions from the respective other state; the abbreviation does not contain such a provision. However, investment income is exempt from the tax in the source country anyway (Art. 10, Paragraph 3, Letter b; Art. 11, Paragraph 1). temporarily free, 13 III. Paragraph 2 1. General Opening up of national tax law. The tax. Discounts 14 that are granted under German tax law for contributions to pension funds, pension funds or insurance companies cannot simply be EL 107 May 2009 Eimermann 7

8 USA Art. 18A 15, 16 Income / assets also for contributions to foreign Facilities or companies are used. The prerequisite is that the respective institution or the insurance company to carry out their work for the benefit of employees in domestic Permanent establishments are authorized (see BMF v, BStBl. I 2004, 1065, Item 174). In contrast, the benefits of the US-StR also apply to contributions to foreign. Pension funds. However, the foreign Institution meet all requirements that it would have to meet if it were an institution in the USA (IRC Sec. 404a [4]). That will usually not be the case. Paragraph 2 breaks these restrictions of the national law of the contracting states through the obligation of the contracting state in which a person carries out their activity (host state) to make contributions to pension plans established in the other contracting state, subject to the specified conditions and limits and subject to To exclude restrictions of paragraph 3 from the provisions or to allow for deduction. 2. Eligibility requirements 15 a) Participant or beneficiary of a pension plan. The benefits of Paragraph 2 can be claimed by persons who are participants or beneficiaries (margin no.9) of a pension plan set up in a contracting state (for the definition of the term pension plan see margin no. 33 ff.). Another prerequisite is that these persons are employed or self-employed in the other contracting state. The person must also be in one of the contracting states. Art. 4 be resident. On the other hand, it is not required that the person who takes up work in a contracting state and is the participant or beneficiary of a pension plan established in the other contracting state isd immediately prior to taking up work in the other contracting state. Art. 4 was resident. This means that the entitlement to the discount is retained even if the person was active in one or more third countries before starting the activity. It is also irrelevant how long the person stays in the other contracting state (host state); however, it must be certified there. 16 b) Employed or self-employed activity. The benefits of Paragraph 2 are only available to people who are employed or self-employed, i.e. who receive income from work. The demarcation between employed and self-employed activities is therefore irrelevant for the purposes of Paragraph 2. The expression employed activity has the same meaning as in Art. 15 (cf. Art. 15 Rz. 11, MA Art. 15 Rz. 53). The expression self-employed is, in accordance with the meaning and purpose of the regulation, not limited to a freelance work. or other self-employed activity isd. Art. 14 af; rather, it is to be understood as an entrepreneurial activity, which also includes the freelance. and includes other self-employed activities (cf. Art. 3 Paragraph 1 Letter f and Art. 7 Paragraph 7). It should be noted that the benefits in Paragraph 2 are not only available to employees 8 Eimermann May 2009 EL 107

9 Retirement pension plans Art. 18A USA, but also for self-employed persons are only granted to the extent that the retirement pension plans recognized in accordance with Paragraph 3 extend to self-employed persons (cf. margin no. 30). For operational Old-age provision for people who are not employees if they have been promised old-age, disability or survivors' benefits due to their work for a company, see BGH v IX ZR 90/05, DStR 2007, 319. c) Tax status. The use of the benefits of Paragraph 2 in the state in which the employed or self-employed activity is carried out does not depend on the person in question being in this contracting state. Art. 4 resident and thus unlimited. is stpfl. The latter will usually be the case. However, the discounts can also be used within the framework of the Beschr. Stpfl. Contributions to the pension plan are claimed (Paragraph 2, Sentence 1, Letter a / b) a) Contribution payment by or for the beneficiary. If the participant or beneficiary pays the contributions to the pension plan himself, he has the right to deduct the contributions when determining his taxable income in accordance with the law of the host country (see margin no. 23). The restrictions of Paragraph 3 must be observed. b) Contribution payment by or for the employer. If someone other than the participant or beneficiary pays the contributions regularly, 19 this will be the employer, the contributions may not be assigned to the participant or beneficiary as a taxable income or taxable wage. This results from both paragraph 2 letter a and paragraph 2 letter b. For example, a person who pays the contributions for the employer could be an affiliate. The employer's contributions include only those meant that the employer as part of an operational Retirement plan owes, ie. Personal contributions and contributions from deferred compensation. The restrictions of Paragraph 3 must be observed. These are not contributions if, within the framework of a direct commitment, provisions are set up in accordance with 6 a EStG; because there is a lack of an outflow of assets (as is also the case with Fischer company pensions in the internal StR using the example of the US-American pension commitments, Cologne 2001, p. 208). If this is seen as the inflow of an asset (an entitlement) on the part of the participant or beneficiary, it may not be taxed (see margin no. 21). c) During or for the period. Paragraph 2 extends not only to contributions made during the period in which the participant or beneficiary is employed or self-employed in the other contracting state, but also to contributions made for this period. One case would be that the employer only pays contributions under the pension plan at a point in time, to EL 107 May 2009 Eimermann 9

10 USA Art. 18A 21, 22 Income / assets that the employee has ceased to work. This does not mean that the contributions are therefore taxable wages in the host country. Increasing claims (Paragraph 2, Sentence 1, Letter b) No tax liability for increasing claims. According to paragraph 2 letter b, claims to old-age provision that are acquired (increase) during the period in which the participant or beneficiary is employed or self-employed in the other contracting state may not be taxed in that state. Example: A-GmbH sends an employee to the US subsidiary to work for two years. There has been a direct commitment for years. The USA may not tax claims that arise on the basis of the commitment while working in the USA, provided that the pension plan is recognized in accordance with Paragraph 3 Letter b. This is to be assumed (see Prot. No. 16 lit. b / bb). The regulation has v. a. for so-called nonqualified deferred compensation plans isd. IRC Sec. 409A meaning. According to this provision, which was introduced by the American Jobs Creation Act of 2004, claims to remuneration that are only due at a later date (deferred remuneration) without the tax recognized plan is based, immediately taxable. The provision also affects claims that US residents including US citizens or non-US residents in connection with an activity carried out in the US due to foreign Pension plans of your foreign Employer. Without the regulation in paragraph 2 letter b, the provision could lead to acquired entitlements, such as those in the example, triggering tax consequences in the USA because the foreign Retirement benefit plans do not meet the requirements of the US-StR for retirement benefit plans. The to Sec. 409A IRC guidelines take expressly from the regulation. Plans that are protected by an abbreviation (Treas.Reg A- 1 [c] [3] [i]). These include the German pension plans listed in Prot. No. 16 letters b / bb. In addition, according to the guidelines, foreign Retirement plans that meet certain minimum standards, from the legal consequences of the IRC Sec. 409A not recorded (Treas.Reg A-1 [c] [3] [ii and iii]). Likewise, foreign legal Pension insurance schemes excluded (Treas.Reg A-1 [c] [3] [ii] [iv]). 5. Contributions and deduction of operating expenses (Paragraph 2, letter b) 22 Deduction as operating expenses. Paragraph 2 letter b stipulates that the employer's contributions to the pension plan can be deducted as a business expense. This does not affect any deduction restrictions resulting from the nation. Law of the contracting states (margin no. 23). The employer's contributions are the employer's own contributions as well as contributions based on deferred compensation (for deferred compensation see Helmreich Die Betriebsvorsorge, NWB F. 26, 4361). 10 bucket man May 2009 EL 107