Category: International; Individuals
Subject: Social Security Benefits from Foreign Nations
Title: U.S. Tax Treatment of Social Security Benefits Paid by Norway and Germany
IRC Sections: 86
Filename: 1213.html
Date Produced: 03/95

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Issues
What is the U.S. tax treatment of social security benefits paid by Germany and Norway to a U.S. citizen or resident?

Answers
1. Benefits paid by Germany are taxable in the U.S.

2. Social Security benefits paid by Norway are exempt from U.S. taxation but may be subject to Norwegian tax.

Discussion
It is clear that absent a special provision, pension amounts received either from government or private sources are includible in gross income. See Regulation Section 1.61-11. Taxation of U.S. Social Security benefits is controlled by Section 86 which provides for partial includibility of such benefits. U.S. law provides no further exclusions. Accordingly, absent an overriding tax treaty provision, social security benefits paid by a foreign government would be fully taxable to a U.S. citizen/resident beneficiary.

German Social Security Benefits
Article 19(1) of the U.S.-German Tax Treaty provides that social security benefits paid by one country to a resident of the other country will be taxable only by the recipient's country of residence. Presumably, the taxpayer in question is a citizen/resident of the U.S. (as defined by the treaty); if so , German social security would be taxable only in the U.S.

Moreover, Article 19(2) provides that social security payments paid by one country to a resident of the other country shall be taxed by the resident country as if the benefits were paid by the resident country. In other words, German social security benefits paid to a resident of the U.S. are treated for U.S. tax purposes as if the benefits were paid by the U.S.

Note: One of the principal purposes of a tax treaty is to eliminate double taxation. Since both the U.S. and Germany tax citizens/residents on worldwide income, it would be possible, absent treaty provisions to the contrary, for income to be taxed in both jurisdictions. I assume that the taxpayer in this case is a resident of the U.S. as the term resident is defined under the treaty; otherwise, the conclusions set forth herein may not be correct.

Norwegian Social Security Benefits
Norwegian social security benefits are excluded from U.S. taxation under Article 19 of the U.S.-Norway Tax Treaty. The applicable language is set forth below.

Social Security payments and other public pensions paid by one of the Contracting States to an individual who is a resident of the other Contracting State or a citizen of the United States shall be taxable only in the first-mentioned Contracting State. This Article shall not apply to payments described in Article 17 (Governmental Functions).

This treaty provision appears to say that only the country paying the benefits has jurisdiction to tax them. In this case, that means that the benefits paid by Norway are excluded from U.S. taxation but subject to the taxing jurisdiction of Norway. Whether the taxpayer in this case would actually owe taxes to Norway would of course depend on current Norwegian tax law, and I am not in a position to advise on that issue.