A new tax rule could make it virtually impossible for some foreign pension funds to avoid paying taxes on earnings from U.S. stocks by claiming to be tax-exempt labor organizations.
The rule would affect only pension funds based in countries that don't have reciprocal tax treaties with the U.S., or where the treaty doesn't address the issue. About 20 British and Dutch pension funds are already embroiled in disputes with the Internal Revenue Service over the matter (Pensions & Investments, June 9).
The rule, first proposed in December 1995, maintains that dues-financed labor pension funds can qualify as tax-exempt labor organizations, even though all other labor union pension plans can't.
In a somewhat convoluted explanation, the Treasury Department rule explains that while such funds would not normally be tax-exempt because they flunk the test as pension funds under the Employee Retirement Income Security Act, federal pension law recognizes they are different from traditional pension funds and exempts them from its requirements. The rule, however, fails to apply similar logic to foreign pension funds, which also flunk ERISA, and can't normally claim tax-exemption status in the U.S.
K. Peter Schmidt, a partner at Arnold & Porter in Washington, said it is "curious" the Treasury Department's rule exempts U.S. dues-financed labor pension funds, but not foreign.