US expat tax filing and German pension funds

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Hi, I am a US american/german dual citizen that has been living in germany for 20 years. recently I found out about my tax filing obligations in the US and am planning on applying for the streamlined offshore procedure soon and have a few questions related to that. I know that many questions on tax returns for US americans abroad have already been asked and solved in these forums so I hope I haven't missed the answers!
The main problem is that I am VERY confused about my pension plan and how to report it. I have a "fondsgebundene Rente", which means that it is a private pension scheme (no employee contributions) whereby I make monthly payments to the company (Ergo versicherung) who invests the money in various stocks, bonds whatever (apparently a company secret). The idea is that hopefully the money will grow that way and I will get a larger pension than if I put it away in a savings account. I have the option of buying back the account prior to reaching pension age, but at a huge loss. Otherwise, there is no option for me to withdraw any partial amount of the savings before retirement. From my reading, I guess this would be some kind of an IRA, though I think a requirement for designating it as an IRA is that the managing company has to be in the US or part of an international company with a branch in the US? but not sure about that.Or is it a foreign trust? I am also muddled about whether I need to declare anything at all about this as I do not receive any payments from it but am only paying in at the moment. I understand that with an IRA, people would want to declare the payments as a deduction from income. because my income is so low, the foreign earned income exclusion gets rid of all my taxable income so I don't have any taxable income. So, I'm not interested in taking advantage of any further deductions at the moment. I just want to make sure that I'm declaring what I need to by law. if it is indeed a foreign trust, then there are apprently potentially serious consequences for not declaring it as such in the FBAR and for not filing the 3520 form on foreign trusts. Anybody have any ideas about this? I'd be extremely grateful for any help! or maybe someone has a reference for somebody with reasonable rates that could just advise me on this one issue? I'm trying to get most things done by myself to save money, but have not been able to figure this one out!

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Disclaimer: Not a tax professional and I can’t guarantee the accuracy of what I am posting.

 

I haven’t ever claimed my company pension on my US tax returns due to what you said— that you’re not receiving a current payout from it and all dividends are reinvested. For any “normal” investments you don’t have to report it if you’re not receiving dividends or haven’t sold any part of it. You don’t get any tax benefits from it though from the US perspective (like you do with a traditional IRA).

 

When you hit retirement age, however, and start receiving a monthly payout, then you have to declare it.

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Can’t edit my post, but check this site out. May be worth consulting with a CPA if these conditions apply to you. You probably already should be seeking help to get your previous returns filed anyway so I would just ask them regarding the pension topic as well.

 

Let us know if you find out any more information.

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AFAIK the USA and Germany have recognized each other's standard pension plans  in the DTA and therefore the deferred taxation that is typical for such pension plans is accepted on both sides of the Atlantic.

But perhaps @Straightpoop can shed some more detailed light on this questions here ?

 

Cheerio

 

I am a professional independent insurance broker, financial adviser, and authorised advertiser. Contact me.
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My thread above only deals with how US accounts are treated on a German tax return... and they are account types specifically mentioned in the treaty... so perhaps that would shed light on how to handle the reverse case (German accounts on a US tax return) but I have no idea. I am confident that for a normal IRA account in the US, they are only taxed in Germany when money is taken out. The thread also deals with the topic of whether contributions can be deducted from a German tax return for the year they are made. I did that for the first time in 2017, so will find out after I file my German tax return this year. Will update the original thread once I find out.

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Wow, nice to come back from the weekend and find all of these helpful replies!:D

@Ben21 your link was especially helpful. according to that, I think my contributions may  be "subject to US tax on the contributions to the plan and the growth in the plan", but I guess this will probably be offset by foreign tax credits or in my case, the FEIE. Like I said, with my low income, I'm not worried that I will actually have to pay tax on the plan, I just want to make sure I'm being transparent about what needs to be declared. I have been informed that my account will definitely need to be declared on the FBAR. The rest is still confusing to me however, and I think I may need some professional help. I will post whatever else I can find out here...

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For whoever's interested, here's what I learned so far (unfortunately not much and nothing conclusive). I guess this will be old hat for most of you. Just to be clear, the point of my original post was not only to find out if I could deduct any contributions to my private pension fund from my income for US tax purposes, but also and most importantly to figure out what information return filing requirements are necessitated by my private german pension scheme. I found out that my private pension fund may be categorized as a PFIC (Passive foreign investment company)...or maybe a trust, but not sure yet.

 

@starshollow already referenced an article about PFICs here

 

had I only read this in my early 20s when I set up the account (more than 15 years ago!)...or at least have been able to see into the future!

 

I also found this one on treatment of foreign pensions as PFICs helpful.

 

Anyways, I am now seeking an accountant's help on this specific issue. While waiting, I was wondering if anyone might be able to give me some pointers, i.e. on how to tell definitively whether my pension is a trust or a PFIC?

 

It says a company is a PFIC if it meets one of the following 2 rules:

  1. Income Test–75% or more of its gross income come from passive investments
  2. Asset Test–at least 50% of the average assets held are producing passive income

How would you go about finding out if the company that manages a pension meets these criteria?

 

Also,could it be that the German/US tax treaty (Article 18A, Paragraph 5, a) bb) would allow exclusion of the pension fund's growth from tax and hence I could avoid the necessity of filing out the information return e.g. 8621 for PFICs? Article 18A, Paragraph 5, a) bb says:

"any benefits accrued under the pension plan, or contributions made to the pension plan by or on behalf of the individual’s employer, during that period or attributable to that period, and that are attributable to the employment, shall not be treated as part of the employee’s taxable income in computing his taxable income in the United States."

 

Furthermore, does anyone have any idea if I should expect the accountant to have to fill in more than one form 8621 for a pension scheme such as I have described in my original post?

 

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I'm very curious where this quest for information ended up. I believe I am in a very similar situation. Did you decide on an approach or find someone who could help for a fee that you could recommend? 

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@skillfulpartridge  @tallison @PandaMunich et al.

 

I am sorry that I am more than 2 years late in responding to the OP's question.

 

Unfortunately, the OP has apparently gotten a lot of confusing and possibly wrong information.

 

The first problem is figuring out the true nature of what the OP imprecisely describes as a "fondsgebundene Rente".

 

Based on the OP's description what he - probably - actually has is a "fondsgebundene Kapitallebensversicherung" which may at some distant future time eventually pay him a Rente provided he doesn't cancel it in the meantime.

 

In US tax parlance a "fondsgebundene Kapitallebensversicherung" is best translated as a "unit-linked endowment life insurance policy":  you pump the premium in, a portion of the premium goes to cover risk life insurance on the policy holder's life and the balance gets put into "units", i.e. some sort of mutual fund either owned and operated by the insurer or some other fund sponsor.

 

The OP stated that this policy has nothing to do with his employment.  In other words, the premiums will not enjoy IRA treatment under US tax law.  Moreover, because it is not employment related, the plan will/should not be characterized as a "pension" plan thus taking it out of the scope of application of Article 18A of the German-US tax treaty.

 

In short, it is nothing more or less than a private endowment life insurance policy/contract which - viewed from the US tax point of view - will eventually result either in a life insurance death benefit if the OP dies before maturity or taxable distributions on maturity whether taken as a lump sum or as an "annuity".  

 

NB:  It is important to distinguish between a "pension" and an "annuity".  The former is paid "on account of past employment" and the latter is nothing more than investment income.  Pensions typically get favorable tax treatment and annuities not so much.

 

It is not a trust.

 

The life insurance contract is not a trust arrangement.  Moreover, it is with a German company.  German law does not recognize trusts so there is no question that there is no requirement to file a Form 3520 reporting a trust. They simply don't exist in Germany.

 

It is not a PFIC.

 

I am 99.99999% certain the OP's policy as he describes it gives him no ownership interest of any kind in any of the "funds" or "units" that the insurer has purchased with his investment.  The policy may give him some flexibility in determining which fund or unit will be bought but he will have no direct or even indirect ownership in or control over any such fund that would trigger the PFIC ownership rules.  No form 8621.

 

It is, however, a FBAR reportable "account".

 

The FBAR is another story.  Under the FBAR rules the policy is treated as an "account".  Simple to report.  At the end of every policy or calendar year, the OP should receive a statement from the insurer reporting on the cash surrender value of the policy.  Compare that number with the year-earlier number and - after converting to USD - plug that number in the appropriate hole on FINCEN 114 (AKA FBAR).

 

It is also a "specified foreign asset" for purposes of the FATCA reporting requirement using Form 8938.

 

The premiums are not currently tax deductible on a US income tax return because this is not a "pension" plan.  On the other hand, if it satisfies the tax deferral requirements of a US life insurance endowment contract, the annual increases in cash value should remain tax deferred until distribution - just as they would be under German law. Under US tax law, the premiums in excess of the amount to cover life insurance risk will be considered "basis" that will not be taxed when eventually distributed.  Whether the OP will be able to accurately and convincingly compute that basis will depend upon his own record-keeping and how much US tax-relevant information he gets from the German insurer.

 

One way - not recommended - to spare himself the difficulty of making such computations would be to die before the policy matures.

 

 

 

 

 

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My reading of the situation is a little different. 

The fact the OP has not mentioned anything about an underlying life assurance I would assume he is talking about a “fondsgebundene private Rentenversicherung” which I would consider to be an “Annuity” if you look at Art. 18 of the DTA.

 

The private Rentenversicherung is similar to a Roth IRA. You make contributions from your after-tax income but you will pay tax only on the profits in retirement.

In the real world there is no difference between a pension and annuity, the annuity being a term to describe how its benefits can be paid out at retirement. However, in the DTA,  pensions seem to be considered in terms of retirement savings from an employment and annuities in terms of a private pension / retirement contract, where an individual saves an amount in agreement for another amount at a time in the future, ie, saving when you’re earning in agreement for a pension income / annuity in retirement.

It’s my understanding that it is an FBAR account and should be reported if the value is in excess of 200k USD or double that amount if married filing jointly and this threshold rule applies even if it is a “specified foreign asset“.

I am not a Tax Advisor and these issues should always be run by your Tax Advisor although German Tax Advisors won’t touch these issues.

On a separate note and in reply to Straightpoop’s comment:

NB:  It is important to distinguish between a "pension" and an "annuity".  The former is paid "on account of past employment" and the latter is nothing more than investment income.  Pensions typically get favorable tax treatment and annuities not so much.

I would disagree with this mostly. Pensions are not considered to be “on account of past employment” generally speaking as people can also purchase private pensions but it does appear to be considered this way in the DTA. Also, Annuities get good tax relief in the USA and in Germany in the form of a Rürup or Basisrente.

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56 minutes ago, Paul@CRCIE said:

The private Rentenversicherung is similar to a Roth IRA. You make contributions from your after-tax income but you will pay tax only on the profits in retirement.

 

Other than the fact that contributions are made from after tax income a Roth IRA has virtually nothing in common with a German private Rentenversicherung.

 

In addition to completely different management, investment decision and control issues, withdrawals from a Roth are completely (US) tax-free.

 

It is largely because there is no equivalent to a Roth IRA in the German investment/retirment planning universe that its recognition as a treaty-favored pension plan was specifically excluded by the German government when Article 18A was added to the treaty.

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In the US: A Roth IRA is funded with aftertax $ and no taxes are paid on the gains at the legal withdrawal time.  A Traditional IRA, as well as a 401K or a 403B plan, is funded with pretax $ and taxes are paid during retirement as funds are withdrawn.

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1 hour ago, Paul@CRCIE said:

It’s my understanding that it is an FBAR account and should be reported if the value is in excess of 200k USD or double that amount if married filing jointly and this threshold rule applies even if it is a “specified foreign asset“.

 

You have dangerously confused the threshold filing requirements for FBAR (a mere $10,000 aggregate value) with those of a Form 8938 (FATCA) a much larger threshold depending upon marital status and whether residence is abroad and applicable to a differently defined set of assets/accounts.  Different thresholds, different forms, different laws/regs, different reporting authorities. 

 

Other than that, just the same.

 

Please be careful.

 

 

 

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9 minutes ago, BethAnnBitt said:

In the US: A Roth IRA is funded with aftertax $ and no taxes are paid on the principle or the gains at the legal withdrawal time.  A traditional IRA, as well as a 401K  or a 403B plan, is funded with pretax $ and taxes are paid during retirement as funds are withdrawn.

 

@BethAnnBitt

 

Substantially accurate but it should also be noted that after-tax contributions, i.e. non-deductible contributions can also be made to a traditional IRA.  The amount of such non-deductible contributions are reported and tracked annually on a Form 8606 filed with the annual tax return.  When distributions are eventually taken, a portion of the non-deductible contributions is recovered as a tax-free return of basis.

 

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On 5/7/2020, 12:03:54, Straightpoop said:

 

 

It is not a PFIC.

 

I am 99.99999% certain the OP's policy as he describes it gives him no ownership interest of any kind in any of the "funds" or "units" that the insurer has purchased with his investment.  The policy may give him some flexibility in determining which fund or unit will be bought but he will have no direct or even indirect ownership in or control over any such fund that would trigger the PFIC ownership rules.  No form 8621.

 

 

@Straightpoop

 

Thank you for your detailed explanation, as I have been wrecking my brain about PFICs for some years now. I agree with your assessment that the above mentioned fondsgebundene Rente would not qualify as a pension under DTA Article 18A, as really only pensions under the Betriebsrentengesetz would qualify for that. I am curious about your conclusion though that it's not a PFIC because the OP has or likely has no direct ownership in the funds/units. Could you elaborate a little more on that? It's an entirely new approach to me and I would like to get an onboard, but I cannot reconcile it so far.

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5 hours ago, Taxtalk said:

I am curious about your conclusion though that it's not a PFIC because the OP has or likely has no direct ownership in the funds/units. Could you elaborate a little more on that? It's an entirely new approach to me and I would like to get an onboard, but I cannot reconcile it so far.

 

Here's the approach:

 

If I didn't buy a PFIC or receive it as a gift I don't own one.

 

If I buy shares in a US Corporation that owns PFICs, I own an undivided equitable interest in the corporation but not it's assets - including its PFIC shares, etc. (This presumes, of course, that the corporation is not an LLC that has elected pass-trhough treatment.).

 

If I buy a life insurance policy from a company that invests my premiums - with or without my knowledge - in PFICs I have a contract with a life insurance company but that does not make me an owner of the insurance company much less the owner of any of the insurance company's assets.

 

If I buy a fondsgebundene Lebensversicherung with a sufficiently "opaque" insurance "wrapper" to qualify it as insurance entitled to tax deferral rather than a thin disguise to obtaining tax deferral on my investments and the insurance company with whom I contract invests in one or more PFICs as opposed to bonds, real estate, etc., I do not own the PFICs, any more than any other asset belonging to the Insurer.  All I have is the contractual right to direct the insurer to invest the non-insurance portion of my contributions in fonds. In most cases I won't even be allowed to pick the fond.  If the insurer internally sells a PFIC the gain or loss belong to the insurer it does not flow out to me in the year of sale.  If the PFIC pays a dividend the dividend belongs to the insurer. It does not flow out to me in the year of sale and I have no legal claim to it.  While the value of my fondsgebundene Lebensversicherung at maturity or at any time prior to maturity will depend upon the performance of whatever fonds (PFICs) the insurer has invested in for me and other insureds, when the policy is cashed in either for a lump sum distribution or as an annuity, the proceeds will be characterized as an annuity or a lump-sum life insurance distribution and taxed as such by whichever country or countries may be claiming a piece of me.

 

Ownership of PFICs might be imputed to the owner of a funds-linked life insurance policy if the insurance "wrapper" is so transparent (or diaphanous) that it fails under the applicable tax law to qualify as insurance and thus fails to qualify for the tax deferral benefits accorded insurance. In such a case, direct ownership of the underlying investments can be imputed to the "insured" policy holder and if those investments include PFICs then the PFICs will belong to the insured in the eyes of the IRS.

 

The purpose of the US PFIC rules is prevent US citizens from obtaining tax deferral by purchasing foreign funds that - unlike US funds - are required to distribute at least 90% of their income annually in order to avoid taxation at the fund level.

 

If, however, the tax law for reasons of public policy allows certain investments to accumulate value on a tax deferred basis, e.g. life insurance, employer pension plans, IRAs, etc. then there is or should be no policy objection to that plan's investing in a PFIC because all income within these deferral schemes are tax deferred anyway.  In short, ownership of a PFIC within an IRA (if you could find a custodian who would buy and hold one for you) or an insurance policy or a BAV does no violence to the principle of allowing tax deferral only where specially permitted.  It will be taxed when the conditions for deferral end and the resulting taxable income will not be characterized as gain, interest, dividends, rent, PFIC distribution, etc. rather, it will be characterized as "pension" if it was employment related or an "annuity" if not.

 

Are you aware of any statute or regulation that contradicts this approach?

 

 

 

 

 

 

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On 5/7/2020, 12:03:54, Straightpoop said:

Thank you for this very detailed response. This turned more into a lesson on the true nature of fondsgebundene Lebensversicherung, which I appreciate and clearly was much needed. If that is how those policies work, then it truly appears that the owner of the policy does not own the underlying Fond that the insurance company is investing in. It makes sense too. I also re-read the instructions on indirect ownership of PFICs to see whether an argument could be made under indirect ownership, but even those rules don't apply in this case. 

I am not aware of any regulation contradicting this approach, but of course that does not mean it doesn't exist. 

 

 

 

 

 

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