members of UK pension plans no longer liable to double taxation on becoming US residents
Employees can now move between the US and UK and remain in their home country pension plan without suffering adverse tax consequences.
On 31 March, the US and UK governments exchanged instruments of ratification for a bilateral tax treaty, meaning reciprocal arrangements for pension plan members came into operation from 6 April 2003 in the UK and will do so on 1 January 2004 in the US.
Replacing an existing treaty dating from 1975, this agreement aims to eliminate the double taxation of income and gains flowing between the two countries.
In practical terms, the treaty means there will be no US tax liability for its contributions or accrued benefits of people who become US residents and continue to participate in a UK approved pension plan.
Nor will there be a UK tax liability for a US citizen resident in the UK who continues to contribute to a US pension plan.
Likewise, there will be no US tax liability for a US citizen who is resident in the UK on contributions to, or benefits accrued under, a UK approved pension plan, up to the limits available for relief on corresponding plans in the US.
Furthermore, there will be no UK tax liability for a UK subject resident in the US paying into a US pension plan
In addition, there is no withholding tax on dividend payments made by a US company to a UK approved pension plan, and vice versa, effective from 1 May 2003 in both countries.
Senior consultant at Towers Perrin, Simon Cann, said in light of these changes, multinational employers should review their retirement plans for existing expatriates, particularly where policies are in place to mitigate current tax practices.
'Employers should also consider reviewing the terms on which overseas assignments are offered to employees,' he added.
The provisions of the convention will apply in both countries in respect of taxes withheld at source from 1 May 2003. In the UK, the agreement applies from 1 April 2003 for corporation tax and 6 April for income and capital gains tax. In the US, it will stand in respect of taxes not withheld at source, such as pension contributions, from 1 January 2004.
The double taxation agreement between the UK and US aims to eliminate the double taxation of income or gains arising in one territory and paid to residents of another territory by dividing the taxing rights each area has under its own domestic law.
Double taxation treaties also protect the Exchequer by including provisions to combat avoidance and evasion, not least through measures providing for the exchange of information between tax authorities.
There are more than 1,300 double tax treaties worldwide, with the UK boasting one of the largest networks of more than 100.
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