Different expert here.
I completely disagree.
I disagree, both, that this should be classified as a foreign annuity, or that this is a tax treaty issue at all.
This is an indemnification payment. Designed to make whole, those suffering physical damages for birth defects caused by thalidomide taken by expectant mothers to ease the symptoms of morning sickness. Unfortunately, Thalidomide often deformed the fetus.
The 1996 italicized additions to 26 USC § 104 - Compensation
for injuries or sickness make this clear: Gross Income
DOES NOT INCLUDE...
"The amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries and physical sickness." are not included in income.
The only exception in which punitive damages are tax-free occurs when such damages are received in a wrongful death action if the applicable state law allows only punitive damages to be awarded in a wrongful death action.
By adding the word "physical" twice, Congress disqualified damages that did not have their origin in a physical injury or physical sickness, such as employment discrimination or injury to reputation claims
Birth Defect Claims, regardless of the source or the form
of the payment are indemnification payments that are made to make damaged persons whole, indemnify.
In terms of understanding the logic for this law, Under the IRS' doctrine of Substance over Form, this does not represent an increase in Net Wealth, hence is not taxable income.
These payments are not taxable to US citizens.
Let me know if you have questions...
(Positive feedback appreciated, that's how we're paid here)