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Old 06.01.2020, 13:33
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US Tax rollover/transfer 2nd pillar pension to vested benefit account

Hello,
Can anyone please help clarify my US tax liability on the rollover/transfer of my second pillar to the vested benefit account (stiftung auffangeinrichtung bvg).
I have not been able to find much literature on the taxation of Swiss transfers/rollovers of the Swiss 2nd pillar pension for a swiss tax resident/US Citizen.

Here is an overview of my situation:
 US/Irish (EU) Citizen
 Italian resident
 Swiss Tax Resident – CH employment contract from 2010-2017 with cross border (fronteliere) Swiss income taxation and pension contributions
 Dec 2017 - terminated swiss employment contract to be self-employed, no change in residency
 July 2018 - 2nd pillar was transferred/rolled over to vested benefit account (stiftung auffangeinrichtung bvg)
 Feb 2019 - 2nd pillar was cashed out when confirmed to leave Switzerland permanently and paid tax at source, while maintaining the same Italian residency
 Income during CH employment was over $120,000
 I am currently working with a US international CPA to become compliant on US taxes and preparing streamlined returns for tax years 2016-2018.

The CPA is suggesting the 2nd pillar (minus the contributions declared in 2016 and 2017) has become taxable in 2018 when it was rolled over to the vested benefit account (stiftung auffangeinrichtung bvg) due to the Internal Revenue Code section for 402(b)(4) plans for ‘highly compensated’ employees. The CPA confirms that my pension is considered discriminatory and not given any preferential treatment under the US- Swiss tax treaty. The rollover (less the previously taxed contributions) was considered a distribution and thus is taxable.
Is this correct?

Does the residency clause (article 4) of the US/Swiss treaty not apply? My residency has not changed since 2010 (since the start of the CH employment, during the rollover, and during the payout). As of 2020 I maintain the same residency. The pension remains vested and tax deferred after the transfer to the vested benefit account (stiftung auffangeinrichtung bvg). Is Swtizerland not the tax authority in this case?
https://www.irs.gov/pub/irs-trty/swiss.pdf - article 4
https://www.gao.gov/assets/690/689773.pdf - page 64

Additionally, with the proposal of the CPA, I am obliged to pay US taxes for the pension in 2018 and I have Swiss taxes on the payout in 2019. The US/Swiss treaty was created to avoid/limit double taxation. Does this not conflict with the treaty? How is a credit for the taxes paid in Switzerland in 2019 declared on US return, when the US taxes were paid in 2018?
I have found very few articles regarding the US taxability of the rollover/transfer of foreign pensions to other vested accounts. And the few articles found, do not give clarity on the situation swiss 2nd pillar pension rollover for US citizen that remains a Swiss Tax resident. If you have found related articles, can you please provide links with this information?

GAO Jan 2018 report
https://www.gao.gov/assets/690/689773.pdf

https://www.chamberlainlaw.com/asset...%20article.pdf -page 18

https://www.pensionskassen-novartis....Population.pdf
-page 10 - Taxation of transfer to another CH employer pension or to a blocked account in Switzerland
• US tax treatment for an individual who will continue to reside in Switzerland is unclear


Thanks for your help/suggestions!
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Old 06.01.2020, 17:12
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Re: US Tax rollover/transfer 2nd pillar pension to vested benefit account

The 2016 KPMG/ Novartis presentation is an excellent source of information regarding US taxation of Swiss pensions.



This 2017 EF thread might be of interest:


https://www.englishforum.ch/finance-...rd-holder.html


The CPA is suggesting the 2nd pillar (minus the contributions declared in 2016 and 2017) has become taxable in 2018 when it was rolled over to the vested benefit account (stiftung auffangeinrichtung bvg) due to the Internal Revenue Code section for 402(b)(4) plans for ‘highly compensated’ employees. The CPA confirms that my pension is considered discriminatory and not given any preferential treatment under the US- Swiss tax treaty. The rollover (less the previously taxed contributions) was considered a distribution and thus is taxable.
Is this correct?
My understanding is that a rollover from a Swiss Pillar II to a Vested Benefit Account is normally considered a distribution for IRS purposes.
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Old 06.01.2020, 21:27
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Re: US Tax rollover/transfer 2nd pillar pension to vested benefit account

Thanks for your reply.

The 2016 KPMG/Novartis presentation concludes on the topic of taxation of transfer to another CH employer pension or to a blocked account in Switzerland that US tax treatment for an individual who will continue to reside in Switzerland is unclear - so no definitive answer.

I had reviewed already the thread you suggested, thank you but it does not seem to clarify the taxation of the transfer to another vested account, only on the distribution.

You mention your understanding of a rollover from a swiss Pillar II to a vested benefit account is a distribution for IRS purposes. Do you know where I can find literature confirming this?

thanks
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Old 06.01.2020, 22:25
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Re: US Tax rollover/transfer 2nd pillar pension to vested benefit account

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You mention your understanding of a rollover from a swiss Pillar II to a vested benefit account is a distribution for IRS purposes. Do you know where I can find literature confirming this?
This New York Society of CPAs article notes:
"Generally a transfer from a foreign plan is treated as a taxable distribution under U.S. tax rules. "

http://www.nysscpa.org/most-popular-....B24bY5D7.dpbs

Note: since Swiss pension plans are not considered a "qualified plan" by the IRS, there should normally be a substantial basis in it. As a result, any difference between the value and the basis should be fairly small with, in theory, minimal US taxes due.
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Old 06.01.2020, 22:59
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Re: US Tax rollover/transfer 2nd pillar pension to vested benefit account

thanks for your reply and link. The documentation does not give specific country-specific obligations, just says "generally". I am preparing a streamlined return, so my pension reported annually is only from 2016 and 2017, so in my specific case, it does make a difference on the value of the considered distribution

the link above is from 2012, but i found additional information in the 2016 US revised model income treaty that the transfer to a tax deferred account within the same country should not be taxable.


https://www.treasury.gov/resource-ce...Model-2016.pdf

Article 17
PENSIONS, SOCIAL SECURITY, ANNUITIES,
ALIMONY, AND CHILD SUPPORT

2. b) Where a citizen of the United States who is a resident of __________ is a member
or beneficiary of, or participant in, a pension fund established in __________, the United States may not tax the income earned by the pension fund as income of the individual unless, and then only to the extent that, it is paid to, or for the benefit of, that individual from the pension fund (and not transferred to another pension fund established in __________ in a transfer that qualifies as a tax-deferred transfer under the laws of__________). In such case, the provisions of paragraph 1 of this Article, which generally is subject to paragraph 4 of Article 1 (General Scope), shall apply.
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Old 07.01.2020, 11:34
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Re: US Tax rollover/transfer 2nd pillar pension to vested benefit account

I'm afraid that part of this issue is that you've been non-compliant with US taxes for a while if I understand this correctly? This is my take on it, given non-compliance:

If you had been filing regularly and paying US taxes regularly, then you would have paid tax on your contributions and your employer contributions when putting it in to pillar II. It could then not be so-called double taxed when taking it out, at least the main basis. Interest is the other issue.

So your case is more complicated and its not clear what the CPA is trying to do now. I guess the easiest would be to file back tax forms and payments for the contributions and then the majority of distribution would not be taxed, but not sure if this is possible legally now or not. I assume the CPA should know this if you have one specialised in this. I would think few people here would have the same situation as you, as we got advice upon coming to CH and paying the right taxes at the time.
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Old 07.01.2020, 11:56
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Re: US Tax rollover/transfer 2nd pillar pension to vested benefit account

My issue is that the CPA is considering the transfer a distribution in 2018 and not still a tax deferred transfer when all documentation I can find does not support their evaluation.
I spoke with the IRS international yesterday and they confirmed the documentation from the the 2016 US revised model income treaty that the transfer of the pension to another tax deferred account should not be considered a distribution.
I cashed out the pension in 2019, and will declare the distribution on that return. But do not understand why the CPA is insisting on including it in 2018 when it seems it should still be considered tax deferred even in the US. Plus the distribution creates even more conflict with the 2019 return considering that I am distributing the same pension in the 2 years.
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