Article 18. PENSIONS

AUSTRIA **380**

Supp. No. **6** **(1998)**

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This Article deals with the taxation of private pensions and

annuities, social security benefits, alimony <sup>payments</sup> <sup>and</sup> <sup>child</sup>
support payments, and with the tax treatment **of** cross-border
contributions to pension plans.

Subparagraph 1(a) provides that, except where the provisions
of Article **19** (Government Service) apply (i.e., where a pension
is paid in respect of Government service), pensions and other

similar remuneration derived and beneficially owned by a resident of a Contracting State in consideration of past employment are

taxable only in the State of residence of the recipient. This
rule applies to both periodic and lump-sum payments. The term
"pensions and other similar remuneration" includes amounts paid

by all private retirement plans and arrangements in consideration of past employment, regardless of whether they are qualified

plans under **U.S.** law, including plans and arrangements described
in section 457 or 414(d) of the Internal Revenue Code. It also
includes an Individual Retirement Account. Treatment of such
pensions under the **1956** Convention is essentially the same as

under this Convention.

Subparagraph **1(b)** provides that social security payments and
other public pensions paid **by** one of the Contracting States to a

resident of the other Contracting State or to a United States

citizen are taxable only in the paying State. The reference to
**U.S.** citizens is to ensure that a social security payment **by**
Austria to a **U.S.** citizen not resident in the United States will

not be taxable **by** the United States. The fact that these provi­
sions are also subject to the provisions of Article **19** places the
treatment of social security benefits paid in respect of past
government service under the rules of that article rather than

this one.

The Memorandum of Understanding clarifies that the term

"social security payments" is not restricted to old age pensions
but refers to all sorts of social security benefits, e.g., to
benefits granted in kind and to payments made in compensation for

work-related diseases or accidents. The term "other public

pensions" as used in subparagraph **1(b)** is intended to refer to

tier 1 Railroad Retirement benefits.

Paragraph 2 provides that annuities derived and beneficially
owned **by** a resident of a Contracting State are taxable only in
that State. An annuity, as the term is used in this paragraph,
means a stated sum paid periodically at stated times during a
specified number of years, under an obligation to make the
payment in return for adequate and full consideration (other than
for services rendered). Annuities are similarly treated under
the **1956** Convention.

Paragraphs **3** and 4 deal with alimony and child support

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payments. Under paragraph **3,** alimony paid **by** a resident of a
Contracting State is taxable only in that State. The payment

need not be taxable to the recipient under internal law of the recipient's State of residence to qualify as an alimony payment. Paragraph 4 deals with periodic payments that are not dealt with

in paragraph **3.** Under this paragraph, such payments for the

support of a minor child by a resident of a Contracting State to a resident of the other Contracting State are exempt from tax in both Contracting States. Alimony and child support payments are defined as periodic payments made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support. Under U.S. law, alimony generally is deductible to the payor and taxable in the hands of the recipient, and child support payments are neither deductible nor included as income to the

recipient. Under Austrian law, _both_ _alimony_ and child support
payments are treated as non-deductible and non-includible pay­
ments.

Paragraph **5** deals with the taxation of contributions, borne

by an individual who renders dependent personal services in a

Contracting State (the "host State"), to a pension scheme estab­

lished in, and recognized for tax purposes in, the other Con­ tracting State. In general, when determining the individual's taxable income, the host State shall treat such contributions in the same way and subject them to the same conditions and limita­ tions as contributions made to a pension scheme in that host

State. However, such treatment is provided only if (i) the
individual was not a resident of the host State and was contrib­

uting to the pension scheme immediately before beginning to work

in that State and (ii) the competent authority of the host State

agrees that the pension scheme in the other State generally corresponds to a pension scheme recognized as such for tax

purposes **by** the host State. **A** pension scheme means an arrange­

ment in which the individual participates to receive retirement

benefits in respect of dependent personal services rendered. **A**
pension scheme is recognized for tax purposes in a State if

contributions to the scheme would qualify for tax relief in that

State. Paragraph **5** permits a deduction from the individual's
income for qualifying amounts borne **by** the individual, whether

the payment is made by the individual or by another person on behalf of the individual. Subparagraph 1(b) and paragraph 3 of this Article are among the exceptions to the saving clause of paragraph 4 of Article 1

(Personal Scope) found in subparagraph 5(a) of that Article.

Thus, Austrian social security benefits paid to a U.S. resident

or citizen are exempt from U.S. taxation. Similarly, an alimony
payment **by** an Austrian resident to a resident or citizen of the

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United States is taxable only in Austria. The provisions of this

Article dealing with pensions, annuities and child support payments are, however, subject to the saving clause of paragraph

4 of Article **1.** Such payments received **by** a resident or citizen
of the United States may, therefore, be subject to **U.S.** tax, if

they are so subject under the Code, even if they would be exempt under the provisions of this Article.