Korean Pension Income and US Tax Implications

Korean Pension Income & US Tax

Korean Pension Income Under US/Korea Taxation Treaty: When it comes to the United States and the international tax treaty with Korea — one of the main purposes behind the tax treaty is to help Taxpayers identify how certain income will be taxed by the IRS or Korea National Tax Service — depending on if the income is sourced. Pension is a key ingredient in any tax treaty. In general, the United States taxes individuals on their worldwide income — and Pension in general is a taxable category of income (domestic and foreign pension). In addition, how the pension interacts with the saving clause is also crucial — because what may sound wonderful on first glance does not really mean what it purports to mean when it is taken in accordance with the saving clause. Stated another way, while US Persons may initially believe they are entitled to some great benefits under the Korea/US Tax Treaty for pension payments, once the treaty is read as a whole — the benefits are not so wonderful. Let’s take a look at how the US and Korea tax treaty impacts pension.

Saving Clause and US/Korean Pension Income

As we work through the United States-Republic of Korea Tax Treaty, one important thing to keep in mind is the saving clause. The saving clause is inserted in tax treaties in order to limit the application of the treaty to certain residents/citizens. With the saving clause, each country retains the right to tax certain citizens and residents as they would otherwise tax under general tax principles in their respective countries — absent the tax treaty taking effect.

What does the Saving Clause Say?

• • • (4) Notwithstanding any provisions of this Convention except paragraph (5) of this Article, a Contracting State may tax a citizen or resident of that Contracting State as if this Convention had not come into effect.

Limitations on the Saving Clause & Koran Pension Income Tax

Despite any limitation created by the saving clause, certain portions of the tax treaty are still immune from the saving clause — which means the tax treaty will stand on issues involving the following tax matters:

The provisions of paragraph (4) shall not affect:

(a) The benefits conferred by a Contracting State under

• • • Article 5 (Relief from Double Taxation)

    • Article 7 (Nondiscrimination)

    • Article 24 (Social Security Payments), and

    • Article 27 (Mutual Agreement Procedure); and

(b) The benefits conferred by a Contracting State under

• • • Article 20 (Teachers)

    • Article 21 (Students and Trainees), and

    • Article 22 (Government Functions), upon individuals who are neither citizens of, nor have immigrant status in, that Contracting State.

ARTICLE 23 Private Pensions and Annuities

• • • (1) Except as provided in Article 22 (Governmental Functions), pensions and other similar remuneration paid to an individual who is a resident of one of the Contracting States in consideration of past employment shall be taxable only in that Contracting State.

    • (2) Alimony and annuities paid to an individual who is a resident of one of the Contracting States shall be taxable only in that Contracting State.

    • (3) The term “pensions and other similar remuneration”, as used in this Article, means periodic payments made

      • (a) by reason of retirement or death in consideration for services rendered, or (b) by way or compensation for injuries received in connection with past employment.

    • (4) The term “annuities”, as used in this Article, means a stated sum paid periodically at stated times during life, or during a specified number of years, under an obligation to make the payments in return for adequate and full consideration (other than services rendered).

    • (5) The term “alimony”, as used in this Article, means periodic payments made pursuant to a decree of divorce, separate maintenance agreement, or support or separation agreement which is taxable to the recipient under the internal laws of the Contracting State of which he is a resident.

What does this Mean?

The general rule is that subject to Article 22 (Government Functions), when a Taxpayer resides in one country and receives pension from employment – only that country of Residence can collect tax. In other words, if a US person resides in the Korea and receives payments for services rendered, only Korea would be the only contracting state to have the opportunity to tax the taxpayer. The same rule applies to annuities and alimony.

It should be noted that there is a distinction between paragraph 1, which refers to pension for past employment and paragraph 2 which refers to annuities but does not necessarily need to be the result of employment.

ARTICLE 22 Governmental Functions

• • • Wages, salaries, and similar remuneration including pensions, annuities, or similar benefits, paid from public funds of one of the Contracting States to a citizen of that Contracting State for labor or personal services performed as an employee of that Contracting State or an instrumentality thereof in the discharge of governmental functions shall be exempt from tax by the other Contracting State.

What does this Mean?

It means that pension and other annuities paid from public funds by one country, to a citizen of that country for work performed for that country shall be exempt from tax in the other country.

ARTICLE 24 Social Security Payments

• • • Social security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State (or in the case of such payments by Korea, to an individual who is a citizen of the United States) shall be taxable only in the first-mentioned Contracting State. This Article shall not apply to payments described in Article 22 (Governmental Functions).

What does this Mean?

It means that social security and other public pensions paid by one country to an individual who is a resident of the other country is only taxable in the first country (excluding Article 22 “Governmental Payments).

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure on matters involving the United States/Korea Tax Treaty

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