Article 17 (Pensions — U.S. Income Tax Treaty

This article deals with the taxation of private ( i.e ., non-government service) pensions and annuities, social security benefits, and support payments. Paragraph 1

Paragraph 1 provides, as a general rule, that the Contracting State of residence of the beneficial owner has the exclusive right to tax pensions and other similar remuneration. The phrase “pensions and other similar remuneration” includes both periodic and lump-sum payments.

The phrase “pension and other similar remuneration” is intended to encompass payments made by a pension fund, as defined in subparagraph 1(m) of Article 3 (General Definitions), or any other payment made by private retirement plans and arrangements in consideration of past employment.

Pensions in respect of government service (other than social security payments, as discussed below) generally are not covered by this paragraph, but rather are covered by paragraph 2 of Article 18 (Government Service). Thus, Article 18 covers section 457, 401(a) and 403(b) plans established for government employees. If a pension in respect of government service is not covered by Article 18 solely because the service is not “in the discharge of functions of a governmental nature,” the pension is covered by this Article.

Paragraph 1 also provides for exclusive residence-country taxation of social security benefits. Like the prior Convention, but unlike the U.S. Model, the Convention provides that social security payments made by one of the Contracting States to a resident of the other Contracting State will be taxable only in the other Contracting State. This provision applies to social security beneficiaries, whether they have contributed to the system as private-sector or government employees. The provision is intended to include United States Tier 1 Railroad Retirement benefits.

Paragraph 2

Under paragraph 2, any annuities derived and beneficially owned by an individual who is a resident of a Contracting State is taxable only in that Contracting State. The term “annuities” means a stated sum paid periodically at stated times during the life of the individual, or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration (other than in return for services rendered). The term “annuities” does not include any pensions or similar remuneration that is described in paragraph 1. Annuities received in consideration for services rendered would be treated as deferred compensation and generally taxable in accordance with Article 7 (Business Profits) or Article 14 (Income from Employment), not Article 17.

Paragraph 3

Paragraph 3 generally covers periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support, including child support payments. Paragraph 3 exempts from tax in both Contracting States such payments made by a resident of one of the Contracting States to a resident of the other Contracting State, unless the payments are deductible in the payer’s Contracting State of residence. Thus, support payments from a resident of a Contracting State to a resident of the other Contracting State are taxable in neither Contracting State if the support payments are not deductible to the payer. By contrast, deductible support payments made by a resident of a Contracting State to a resident of the other Contracting State are taxable, exclusively, in the recipient’s State of residence. Although the structure of the Article is different, the results are the same as under the U.S Model provisions.

Relation to other Articles

Paragraphs 1 and 2 of Article 17 are subject to the saving clause of subparagraph 4(a) of Article 1 (General Scope). Thus, a U.S. citizen who is a resident of Japan and receives a pension, a social security payment, or an annuity payment will be subject to U.S. tax on the payment. However, paragraph 3 of Article 17 is not subject to the saving clause, by reason of the exception of paragraph 5 of Article 1. Accordingly, a U.S. citizen who is a resident of Japan will not be subject to U.S. tax on support payments made by a resident of the United States.