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Tax Deferral Schemes - Not In the US!

Tax Deferral Schemes - Not In the US!

Many countries have their own version of a ‘tax deferral’ investment schemes. These are often intended to spur investment in the capital markets and prevent money from sitting under mattresses. However, the US tax treatment of your investment will remain the same - they will be taxable each year and must be reported on the tax return.

Norway - Aksjesparekonto

As of Sep 1, 2017, it is possible to save in shares and mutual funds through “Aksjesparekonto”. This investment scheme makes it easier for individuals to save in the stock market. By making it easier for individuals to save in shares, it will be more attractive to save in the stock market in the future.

Investors can do a (Norwegian) tax free transfer of shares and mutual funds to an account opened between Sept 1 & Dec 31 2017. Moving money between one account to another will not have a US tax impact.

In Norway, your investment gains in this account will be tax free until you withdraw funds from the equity accounts. Similarly, the losses are not deductible until that point.

In the U.S. - these investment accounts are not tax deferred and must be reported on your tax return annually.

UK - ISA Account

Across the North Sea in the UK, there are ISA accounts. These Individual tax-deferred (in the UK) saving accounts (ISA) do not qualify for income deferral in the U.S.. The income earned on those accounts must be reported on U.S. tax returns annually. ISA is not treated as pension plan in the US and therefore has different treatment than UK pension accounts.

Canada - TFSA Account

TFSA is tax-free saving account in Canada. Just like the aforementioned accounts in Norway and the UK, gains on this account must be reported on annual U.S. tax returns.

Additional Reporting Requirements Depend on Investment Types

All three of the accounts mentioned above allow for investment in mutual funds  Non-U.S. Mutual Funds are considered PFIC (Passive Foreign Investment Company) and may generate a requirement to file form 8621 on your U.S. tax return, with income included as ordinary income.

Example: U.K. ISA account contains a mixture of OEICS, investment trusts and individual shares. OEICS are collective investment schemes that are treated in the US as PFIC, requiring Form 8621.

Finally - it is important to report make sure to report all account types on FBAR & FATCA (Form 8938) if applicable.

Is there anything that qualifies for tax deferral in the U.S.?

Yes - the U.S. has particular bilateral tax treaties with certain countries which contain favorable income-deferral pension provisions. Through these treaties, contributions to U.K. pension plans, as well as growth in the plan do not need to be included in the annual taxable income on the U.S. tax return.   The same provisions hold true for Canada, Germany, the Netherlands, and Belgium.

It is important to note that there are tax optimization strategies where adding the income to may be beneficial for the taxpayer (even though it is not required), reducing their tax percentage when they receive the pension distributions upon retirement.

Ines Zemelman, EA
Founder of TFX