St. Kitts & Nevis

Tax-deferred employer plans

The St. Kitts & Nevis Social Security Fund provides retirement pensions, sickness benefits, and other social insurance coverage. Employers and employees each contribute a percentage of insurable earnings. The retirement pension is payable upon reaching qualifying age with sufficient contribution credits. The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do.

The Social Security Fund is a government-operated social insurance scheme. Statutory social insurance programs are generally not trusts under Treas. Reg. §301.7701-4(a) (there is no trustee holding property for identifiable beneficiaries; benefits are statutory entitlements), so §301.7701-7 (which only sorts an existing trust into domestic or foreign) is not reached. To the extent the Social Security Fund is not a trust, Forms 3520 and 3520-A do not apply.

Private employer-sponsored pension plans exist in St. Kitts & Nevis but are not widespread. Where a private plan holds assets in a trust arrangement, the trust is foreign under §301.7701-7. Rev. Proc. 2020-17 does not require a treaty, so the absence of a U.S.–St. Kitts & Nevis income tax treaty does not by itself disqualify such a plan; whether it qualifies instead depends on plan-specific analysis of the revenue procedure's conditions. Absent a qualifying exemption, U.S. participants in any such pension trust file as the note at the end of this section explains for a plan an employer contributes to.

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Trust and LLC framework

The Federation of St. Kitts and Nevis operates as a two-island state with separate legislation for certain matters. Nevis has enacted its own trust and LLC legislation that is distinct from the federal laws. The key statutes for U.S. practitioners are the Nevis International Exempt Trust Ordinance 1994 (as amended) and the Nevis Limited Liability Company Ordinance 1995 (as amended).

Nevis imposes no income tax on international exempt trusts (Ordinance s.43). Nevis LLCs formed on or before 31 December 2018 that did not carry on business in the Federation were exempt under the LLC Ordinance, but the Nevis LLC (Amendment) Ordinance 2018 ended those exemptions after 30 June 2021, and later-formed LLCs fall under the Federation’s income tax. There is no U.S.–St. Kitts & Nevis income tax treaty.

Nevis international exempt trusts

Registered international exempt trusts are exempt from Nevis income tax, death-related estate, inheritance, succession and gift taxes, stamp duty and exchange controls (Ordinance s.43). The maximum duration of an international trust is 100 years from creation, except purpose trusts (s.5). These trusts are marketed primarily for asset protection, and they include features designed to frustrate creditors: a very short limitation period for fraudulent disposition claims (a settlement made more than two years after the creditor’s cause of action accrued cannot be attacked as fraudulent by that creditor; if made within those two years, the creditor must sue within one year of the settlement; there is no discovery rule), a requirement that the creditor prove the case beyond a reasonable doubt (a higher standard than the typical civil preponderance standard), and a provision that foreign judgments against the trust are generally not enforceable in Nevis.

For U.S. tax purposes, a Nevis international exempt trust is a foreign trust. The asset protection features do not affect the U.S. tax classification. A U.S. person who settles a Nevis trust is subject to the full range of reporting obligations under §6048, regardless of whether the trust was established primarily for asset protection rather than tax planning.

LLC and trust combinations

A common structure involves a Nevis LLC owned by a Nevis trust. The U.S. person settles assets into the trust, which forms a Nevis LLC to hold specific investments or assets. This layered structure is marketed as providing both the asset protection features of Nevis law and the operational flexibility of an LLC.

For U.S. reporting, the trust and the LLC are analyzed separately. The trust is a foreign trust subject to §6048. Under Treas. Reg. §301.7701-3(b)(2)(i), a foreign entity all of whose members have limited liability (the case for a Nevis LLC) is by default an association taxable as a corporation; it is disregarded (one owner) or a partnership (two or more) only if it elects that treatment on Form 8832. If disregarded, its assets and income are attributed to the trust, and the trust reporting covers the full picture. If it is (or defaults to) a corporation, Form 5471 may apply; if a partnership, Form 8865.

Practitioners should be alert to the aggressive marketing of these structures. Nevis law does not recognize foreign judgments against the trust (Ordinance s.28), but that does not remove the U.S. settlor from a U.S. court’s jurisdiction: U.S. courts have ordered settlors to repatriate trust assets and have held them in contempt for failing to comply.

Penalties and practical notes

All standard §6048 reporting applies. The transfer of property to a Nevis trust triggers Form 3520 Part I. If the U.S. person is the owner of the trust under the grantor trust rules (which §679(a)(1) makes automatic for a U.S. settlor whenever the trust has or may have a U.S. beneficiary, regardless of any retained power), Form 3520-A and Form 3520 Part II are required annually. Distributions to U.S. beneficiaries require Part III reporting.

Penalties under §6677(a) are the greater of $10,000 or 35% of the gross reportable amount for Parts I and III. Under §6677(b), the penalty for Part II and Form 3520-A is the greater of $10,000 or 5% of the gross reportable amount. Because these structures are often used for asset protection, U.S. persons may face particular IRS scrutiny, and willful failure to file can result in additional penalties beyond §6677.