Hi and Happy Thanksgiving to everyone,

This is a question about pension funds in a foreign country eg: UK or Canada.

If a US citizen or permanent resident is employed in a foreign country and he is contributing to the foreign company's pension fund, can he claim his contributions as tax deductible like a traditional IRA in the US?

Thanks for any advice,
Sam

Sam:

Sorry. Contributions to a foreign pension plan are not deductible on your U.S. tax return.

They may be deductible on the UK/Canadian tax returns, though.

Under the U.K.-U.S. Treaty, if you already have a U.S. retirement plan, you may be able to make contributions to the U.S. retirement plan and have them deductible for U.K. purposes. See Article 18, paragraph 2.

You need to handle this really carefully. You could run into a PFIC situation very easily if you are contributing to a foreign IRA type plan.

If it is strictly a pension plan then I think you would be safe from the PFIC rules but if you manage it like an IRA/401(k) type arrangement and are investing in foreign mutual funds then I think you'd run afoul of the PFIC rules which could be very costly.

I'd like to hear IntlTax's thoughts on this.

There are all sorts of issues with a foreign retirement plan that is similar to an IRA for U.S. citizens and residents. First, the plan would be a trust that would be subject to the foreign trust reporting requirements (see Form 3520 and 3520-A). Second, constructive receipt rules would apply to cause the income earned by the trust to be immediately taxed to the beneficiary. Third, as you point out, if the trust owns foreign mutual funds they could be considered PFICs (the trust itself would not be a PFIC because it is not a corporation). There are likely other issues as well. After these rules are considered, any treaty analysis would need to be overlayed.