US-Switzerland Tax Treaty and Timing of Immigrant Status for Swiss Pension Taxation

[fbelle]

Hello,

I moved from Switzerland to the US in June 2024 on a K-1 non-immigrant visa, and became a US tax resident under the substantial presence test. I received my green card in November. In July, I received a lump sum payout from a Swiss public sector pension fund and a final salary payment for government service. Both were taxed at source in Switzerland.

Under Article 19(2)(a) of the US–Switzerland tax treaty, government pensions are taxable only by the source country. Article 1(3)(b) states the saving clause does not override this for individuals who are neither US citizens nor hold immigrant status. At the time of payment in July, I had not yet received a green card.

Since I was not a US citizen or green card holder at the time of receipt, does the treaty protection apply and can I claim an exemption form US taxation? However, the treaty and technical explanation are not explicit on whether immigrant status applies retroactively which would mean that the saving clause applies to the full resident period if immigrant status is acquired later in the same year?

I am unsure by which interpretation to go by. Has anyone encountered this dual-status scenario and taken the position that the exemption holds because immigrant status began after payment was received?

Thank you for your help in advance!

[pk]

@fbelle , whereas I have not seen this particular scenario  ( i.e.  the effects of  change of immigration status from no-immigrant to immigrant affecting  taxability of a contracting "govt/public source  " distribution. ).  However, my general sense  from most of the treaties and OECD model treaty ,  all  public source payments are taxable ONLY to the distributing country and over-riding the savings clause.

However, I need to go back and refresh/re-study the  US-Switzerland Tax Treaty / Technical explanations etc. before I take a firm position.  Will come back prob. in a day.

pk

[fbelle]

Hello pk, 

thank you for your insight! I forgot to mention that I am not a Swiss but a Belgian citizen, which might have implications on the treaty applicability.  Thank you so much for looking into this!

[fbelle]

Hi @pk ,

just wanted to follow up in case you had a chance to revisit the US–Switzerland treaty and take a firmer view on the public pension exemption question I had. I really appreciated your thoughtful initial reply!

[pk · Accepted solution]

@fbelle , sorry for the delay -- I was actually looking for you post so I could reply --- just so many others had  come in that I lost track of where your post was. Thank you for coming back in --- put it up in the visible window.

There have been many updates  etc. to the  treaty but what is interesting  to me is   that article 19.2(a)    refers to public fund based pensions/ remuneration being ONLY taxable  in  distributing country but  as an afterthought  Article  19.4  allows taxation of Social Security and other public funded  pensions to be also taxed by the resident country  at no more  than  15% tax rate .   So this  conflict/ carve out may not help your situation.

At the same time  and on looking over your timing of entering the USA and getting the GreenCard creates another  issue --- Based on   (a)  06/xx/24  legal entry  in to the USA,   (b) Passing SPT in sometime in Nov 2024 and (c) Meeting the GreenCard Test in  11/xx/2024 ,  your residency start date would be the first day legal presence  in the year.  Thus  since you were a Tax resident from 06/xx/2024 , there is NO Way  to exclude this foreign source income from US taxes.

So my conclusion is that you have to recognize  the   Total Distribution as  Pension distribution for US tax Purposes -- the Gross amount.  You report this just as if you had received  a 1099-R  ( not a substitute 1099-R) -- you tell TurboTax you have pension income,  do not have EIN of the distribution /administrator,  Box 1 has the whole amount of the distribution, Box 2a has the taxable amount  ( this should be total distribution LESS any contribution that you had made  over the participating years ),  Box 2b , check the Box  "Total Distribution",   Box 7 -- Distribution Code 7 -- Normal.

Then when in  "Deductions and Credits" section, select Foreign Tax Credit and follow through with filling out  form 1116 --- your  Foreign source income is  the 1099-R taxable income, and Foreign Taxes Paid   is  the actual taxes  paid to Switzerland.    

This path generally implies that you are ignoring article 19  but just using the  article 23 .2   ( first sentence ).

Does this make sense ?  Is there more I can do for you ?

pk

[fbelle]

Hi @pk ,

Thank you so much for your detailed response and for taking the time to revisit the treaty provisions!

Regarding the nature of the payment, I wanted to clarify that it came from a Swiss second-pillar pension fund, funded by both employer and employee contributions, with the employer being a government agency. Based on that, I believe it falls under Article 19(2) , rather than Article 19(4) ?

You're absolutely right that the timing of my entry into the US makes this a tricky case. That said, I wonder whether there is any room to argue in good faith that the treaty protection under Article 19(2)(a) still applies, given that Article 1(3)(b) exempts individuals who are neither US citizens nor have immigrant status from the saving clause, and I had not yet acquired immigrant status at the time the payment was received.

I understand that the residency start date is retroactive for tax purposes, but the treaty language seems to distinguish based on immigration status, not just tax residency. Could that open the door to a narrower interpretation where the exemption still applies, simply because immigrant status was only acquired after the income was received?

If the treaty protection still doesn't apply, which I now fear,  I do have a follow-up question:  You mentioned subtracting my own contributions over the years. Just to confirm, does that mean only the employer contributions and gains in the fund would be taxable as US income? That would significantly reduce the tax burden, since I personally contributed roughly half of the total amount.

Thanks again for your insight and generous help, it’s very much appreciated!

Kind regards,

fbelle