ARTICLE 19

Pensions, Social Security, Annuities, and Child Support

This Article deals with the taxation of private (i.e., non-government service) pensions and annuities, social security benefits, and child support payments and with the tax treatment of contributions to pension plans.

Unlike most U.S. tax treaties, the Convention contains no rules for alimony. As a result, alimony payments fall under the rules of Article 22 (Other Income), which, in general, allow items of income of a resident of a Contracting State to be taxed in that State and the State in which the income arises.

Paragraph 1

Paragraph 1 provides that distributions from pensions and other similar remuneration beneficially owned by a resident of a Contracting State in consideration of past employment are taxable only in the State of residence of the beneficiary. It is understood that the term “pension distributions and other similar remuneration,” includes both periodic and lump sum payments.

The phrase “pension distributions and other similar remuneration” is intended to encompass payments made by private retirement plans and arrangements in consideration of past employment. In the United States, the plans encompassed by paragraph 1 include: qualified plans under section 401(a), individual retirement plans (including individual retirement plans that are part of a simplified employee pension plan that satisfies section 408(k), individual retirement accounts, individual retirement annuities, section 408(p) accounts, and Roth IRAs under section 408A), non-discriminatory section 457 plans, section 403(a) qualified annuity plans, and section 403(b) plans. The competent authorities may agree that distributions from other plans that generally meet similar criteria to those applicable to other plans established under their respective laws also qualify for the benefits of Paragraph 1. In the United States, these criteria are as follows:

a) The plan must be written; b) In the case of an employer-maintained plan, the plan must be nondiscriminatory insofar as it (alone or in combination with other comparable plans) must cover a wide range of employees. including rank and file employees, and actually provide significant benefits for the entire range of covered employees;

c) In the case of an employer-maintained plan the plan must contain provisions that severely limit the employees’ ability to use plan assets for purposes other than retirement, and in all cases be subject to tax provisions that discourage participants from using the assets for purposes other than retirement; and

d) The plan must provide for payment of a reasonable level of benefits at death, a stated age, or an event related to work status, and otherwise require minimum distributions under rules designed to ensure that any death benefits provided to the participants’ survivors are merely incidental to the retirement benefits provided to the participants.

In addition, certain distribution requirements must be met before distributions from these plans would fall under paragraph 1. To qualify as a pension distribution or similar remuneration from a U.S. plan the employee must have been either employed by the same employer for five years or be at least 62 years old at the time of the distribution. In addition, the distribution must be made either

(A) on account of death or disability, (B) as part of a series of substantially equal payments over the employee’s life expectancy (or over the joint life expectancy of the employee and a beneficiary), or

(C) after the employee attained the age of 55.

Finally, the distribution must be made either after separation from service or on or after attainment of age 65. A distribution from a pension plan solely due to termination of the pension plan is not a distribution falling under paragraph 1.

Pensions in respect of government service are not covered by this paragraph, but are covered either by paragraph 2 of this Article, if they are in the form of social security benefits, or by paragraph 2 of Article 20 (Government Service). Thus, Article 19 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 20 solely because the service is not “in the discharge of functions of a governmental nature,” the pension is covered by this Article 19. In the case of Venezuela, in general, pensions in respect of government service will be covered by this article and not by paragraph 2 of Article 20, because, in general, such pensions are not paid by, or out of the funds created by, Venezuela.

Paragraph 2

The treatment of social security benefits is dealt with in paragraph 2. This paragraph provides that payments made by one of the Contracting States under the provisions of its social security or similar legislation to a resident of the other Contracting State or to a citizen of the United States will be taxable in the Contracting State making the payment. This paragraph applies to social security beneficiaries whether they have contributed to the system as private sector or Government employees.

The phrase "similar legislation" is intended to refer to United States tier 1 Railroad Retirement benefits, as is clarified in paragraph 15 of the Protocol.

Paragraph 3

Under paragraph 3, annuities, other than those covered in paragraph 1, that are derived

from a Contracting State and that are beneficially owned by an individual resident of the other Contracting State are taxable only in the State from which they are derived. An annuity, as the term is used in this paragraph, means a stated sum paid periodically at stated times during a specific time period, under an obligation to make the payment in return for adequate and full consideration (other than services rendered). An annuity otherwise covered in this paragraph received in consideration for services rendered would be treated as deferred compensation and generally taxable in accordance with Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services).

Paragraph 4

Paragraph 4 deals with child support payments, defined as periodic payments for the support of a minor child made pursuant to a written separation agreement or a decree of divorce, separate maintenance, or compulsory support. Under paragraph 4, such payments made by a resident of a Contracting State to a resident of the other Contracting State are taxable only in that other State.

Relation to Other Articles