How to determine if foreign government pension is PFIC or Foreign Trust

[reikiman]

In another thread discussing filing requirements for foreign pensions (Romania) https://forum.freeadvice.com/threads/filing-taxes-in-ny.659967/#post-3712350 -- I saw a response suggesting that -- "few, if any, Romanian pensions will qualify as a qualified plan under U.S. tax law" -- to which someone replied that might "lead to PFIC or 3520 filing requirements."

I looked up PFIC (Passive Foreign Investment Company) and 3520 (Foreign Trusts) and don't see how they would apply to a government pension like the program in Romania.

The descriptions for both PFIC and Foreign Trusts sound like business/financial transactions - an investment company or a trust. Both would be different from a government pension program.

Can you explain further?

How would one determine that a government run pension (Romania) would fit the definition of a foreign trust? Or fit the definition of a passive foreign investment company?

 

[Just Blue]

In another thread discussing filing requirements for foreign pensions (Romania) https://forum.freeadvice.com/threads/filing-taxes-in-ny.659967/#post-3712350 -- I saw a response suggesting that -- "few, if any, Romanian pensions will qualify as a qualified plan under U.S. tax law" -- to which someone replied that might "lead to PFIC or 3520 filing requirements."

I looked up PFIC (Passive Foreign Investment Company) and 3520 (Foreign Trusts) and don't see how they would apply to a government pension like the program in Romania.

The descriptions for both PFIC and Foreign Trusts sound like business/financial transactions - an investment company or a trust. Both would be different from a government pension program.

Can you explain further?

How would one determine that a government run pension (Romania) would fit the definition of a foreign trust? Or fit the definition of a passive foreign investment company?

Honestly, not trying to pick on you or anything...but please, addthis question to your other thread. The volunteers of this site prefer that you keep all questions on the same basic topic to the same thread. Thanks...

 

[reikiman]

Uh.. in the other one you asked me to post a new thread. Confused.

 

[Just Blue]

Uh.. in the other one you asked me to post a new thread. Confused.

Yes, because you "hijacked" another members thread. Please post all questions on this topic to your original thread:

https://forum.freeadvice.com/threads/fatca-or-fbar-filing-thresholds.659977/

It makes it easier to give good advice/direct if all questions/comments on the same topic are kept to one thread.

 

[Taxing Matters]

Can you explain further?

How would one determine that a government run pension (Romania) would fit the definition of a foreign trust? Or fit the definition of a passive foreign investment company?

While most people do not really think about it, in the U.S. many private pension arrangements are actually trust arrangements. For example, XYZ corp would send the employer and employee contributions for the pension plan to a pension trust, and the trustee of the trust is the one who manages and pays out the pension benefits. You see that less with government pensions, but it does occur. The same kind of arrangement could be done with foreign pensions, too. So depending on the details a persons interest in such a trust may be subject to reporting on Form 3520. That is simply an information return; there is no tax to pay with the Form 3520, but penalties do apply if you fail to file it when required.

The PFIC rules get a bit complex, but the essence of them is that a U.S. person has an interest in a foreign corporation in which either most of its income is passive income or most of its assets generate passive income. Here, for example, if your foreign pension was, say, in the form of interests in a mutual fund, that mutual fund may be a foreign corporation and your shares of the mutual fund would make you a stock holder in that mutual fund. In that case, the PFIC rules would apply.

So the details of your pension matter. If this is a pension that is simply paid directly to you by the foreign government (similar to pensions under old U.S Civil Service Retirement System) and is not a pension investment through a foreign trust or corporation then you won't have a Form 3520 or PFIC requirement.

 

[davew9128]

A real world example would be the Hong Kong MPF. It's a government mandated contributory retirement fund, where both the employer and employee contribute a percentage of gross wages to it. In Hong Kong its their form of 401(k), and US citizen employees think of it as such. However under US law it is not recognized as a trust under IRC 402, and doesn't benefit from the tax deferral a US recognized plan receives. As such, not only are the employer contributions considered additional wages for US purposes. but where the underlying assets of the plan are generally non-US mutual funds, the plan itself is considered to be a PFIC and earnings taxable.