When
a US person (like, say, a 401(k) plan administrator) pays taxable
income to someone outside the United States, 30% must be subtracted from
the payment and given to the IRS. This is the withholding tax required
by IRC §1441(a).
Paying
30% tax to the United States on a 401(k) distribution when the income
tax treaty between the United States and Switzerland says that the USA
cannot tax the distribution? Sounds like a bad idea. Here is how
you prevent this from happening.
Fill
in Form W-8BEN and give it to the 401(k) plan administrator. In
particular, use Part II of Form W-8BEN to use the CH-income
tax treaty to force the result of zero tax withholding in the United
States.
On Line 9, you certify that you are a resident of New Zealand.
On Line 10, you claim the benefit of Article 18.1(a) to create a rate of withholding of 0% on your 401(k) distribution.
The
explanation is that the treaty gives exclusive power to tax the 401(k)
distribution to the country of residence. Nothing more remarkable than
that will be required to complete Part II.
Other countries' treaties
The
US has income tax treaties with many countries. Treaties like CH's (the country of residence gets to tax cross-border pension
distributions) are common but far from universal. The treaties may
provide for different treatments for different types of distributions.
For example, the US-UK income tax treaty gives the source country the
exclusive right to tax lump sum distributions. US-UK Income Tax Treaty,
art. 17.2 (2001, as amended).
Conclusion
If
you are receiving cross-border retirement account distributions, look
for an income tax treaty between your home country and the United
States. It may well give you a better tax result than the default tax
rules of the United States and your home country. The pension benefits
are most commonly found in article 18, but because each country
negotiates its version, and the treaties were adopted at different
times, you might find pension benefits clauses in other articles.
