Use Form W-8BEN to eliminate US tax

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.