Expatriates are often intrigued by the complexity in taxation of cross border pension income and/or contributions. There is general understanding that tax treaty prevents double taxation of the same pension income. It is however, not always the case as they later find out that the right to tax vests with the country of residence in many cases despite the tax treaty provisions.
Recent Court decision in Sweden can be an eye opener for many U.S. expatriates who live in Sweden. The facts of the case in nutshell are as follows:
A 67 year Swedish tax resident had retirement funds in 401(k) account. Pursuant to his needs, he rolled over 401(k) in to IRA. As readers are aware, such rollovers have no tax consequences in U.S. However, Swedish Court decided that such rollovers are subject to tax in Sweden. Pensions article in U.S. – Sweden tax treaty does not make such rollovers tax exempt in Sweden. Court ruled that the tax treatment and tax triggering events in U.S. are not relevant for Swedish tax purposes since such treatments must be analyzed based on Swedish tax rules.
Court therefore ruled that the entire rollover amount was subject to tax in Sweden as pension income. The treaty, Court clarified, does not limit Sweden’s right to tax over the pension income of a person who is a Swedish tax treaty resident on the date of such rollover.
Pre-immigration planning is the quintessence for any expatriate and such rulings must be considered prior to embarking on a global employment opportunity. Consulting a cross border professional will certainly help prevent any undesirable consequences and falling in to the tax traps for the unwary.
CPA Global Tax Blog 