Tax burden on Provident Fund

[Dak2019]

My client lived and worked in Dubai with Emirates Airline, he became a resident in 2018 and moved to the US February 2019. Upon resignation with Emirates he had to withdraw his Provident Fund.( which is like a savings that the company put into and the employee, however you are not entitled to it unless you stay 7 years with the company). His that money consider income and is it taxed?

[itonewbie · Accepted solution]

The UAE has an unfunded mandatory end-of-service gratuity.  It is payable upon termination of an employment.  That would be taxed as compensation in the year it was paid but you need to sourced it over the period of employment to reflect how the entitlement is computed.

If you are talking about provident fund or pension, there is not a mandatory scheme yet although the government has been toying with that idea for years.  I am not personally aware of any major company offering that to expats on a voluntary basis.  If your client also did participate in a voluntary company-sponsored provident fund/pension scheme, please let us know as that would be a different kettle of fish.

[Dak2019]

Where would I put it on the tax form ? what do you mean by source it over the period of employment to reflect how the entitlement is computed? 

[itonewbie]

Where you make the input would depend on the tax product you use.

On the tax return, it'd go on F.2555.  However, you must source the income over the employment period because only the portion allocable to the current year would be excludable, the portion allocable to the immediate preceding year may be excluded to the extent there's any excess exclusion limit from that prior year, and nothing related to the earlier year can be excluded at all.

[Dak2019]

It is a Provident Fund that Emirates Airlines off to their employees. The Provident Scheme is a long-term savings arrangement provided to more senior positions and is designed to help plan for retirement. The company contributes 12% of basic salary. You are required to contribute 5% of your basic salary. End of Service (gratuity) payment is calculated as 21 days basic salary per annum for the first 5 years of service and then 30 days basic salary per annum for each year of service beyond 5 years of service.

So would you use the form F2555 and would the exclusion you describe is what would be used. Because its a saving is what is confusing me.

[itonewbie]

Yes, Emirates is the market leader for pension scheme.  My understanding is that they pay the higher of either though but not both.  Are you saying your client received both?  If so, ESOG should be reported as explained.

Like I said in my earlier post, provident fund/pension is a different kettle of fish.  The tax treatment is very different.  You cannot treat that the same way as EOSG.

Does the employment contract require participation and contribution by your client?  If not, would your client be entitled only to the government's mandatory EOSG?  Is the PF/pension scheme funded?  If so, how was the contributions invested and does the investment include foreign mutual funds?  Was any or all of the employer's contributions vested?  What reporting position was taken on the prior years for employer vs employee contributions?  Was F.8621 ever filed?

As you can see there is a lot to consider.

[Dak2019]

No my client did not receive both he just got the provident fund. The company did contribute and he contributed too. So would he have to pay taxes for the amount before he was a resident or just for the portion that he was a resident. 

[itonewbie]

But you haven't answered all the questions.  They are all pertinent.

[lw959]

Can Emirates Airline Provident Fund distribution upon termination be rolled over to an IRA using the "60 day rule"?

[itonewbie]

@lw959No.