Double Taxation Agreements

Double taxation conventions between the UK and Spain and the UK and Norway were signed on the 14^th March 2013.  The treaties can be viewed here

http://www.hmrc.gov.uk/taxtreaties/signed.htm 

Both treaties provide for a 0% rate of withholding on dividends paid to pension schemes.  This raises the issue of whether a UK insurance company with pension business will be able to access this 0% rate?

In my opinion for linked pension business the answer should be yes, 0% withholding should be available for UK insurance companies both for Spanish and for Norwegian dividends.

Starting with Norway the definition section of the treaty includes the following wording

“The term “pension scheme” means any scheme or other entity established in a

Contracting State which operates to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements; and in the case of the United Kingdom, is generally exempt from income taxation and is a pension scheme (other than a social security scheme) registered under Part 4 of the Finance Act 2004, including pension funds or pension schemes arranged through insurance companies and unit trusts where the unit holders are exclusively pension schemes.”

A UK insurance company with linked pension retail investors will be administering a registered pension scheme and therefore should be able to access the 0% withholding rate for that linked business.  In the case of institutional pension business the insurance company is unlikely to be a registered pension scheme but its policyholders will be (probably) registered pension schemes.  Insurance companies with linked institutional pension business should be able to access the 0% rate for that business on the basis that it is in a pension fund arranged through an insurance company where the unit holders are exclusively pension schemes.

The analysis for Spain is very similar although the definition of pension scheme is more restrictive

“In the United Kingdom: any plan, scheme, fund, trust or other arrangement established in the United Kingdom which is generally exempt from income taxation; and operates principally to administer or provide pension or retirement benefits or to earn income for the benefit of one or more such arrangements.”

Then the protocol to the treaty provides some clarification on the position of UK pension companies with identical wording to the definition section of the Norwegian treaty.

“in the case of the United Kingdom, pension schemes (other than a social security

scheme) registered under Part 4 of the Finance Act 2004, including pension funds or

pension schemes arranged through insurance companies and unit trusts where the unit holders are exclusively pension schemes.”

Although both treaties are positive developments in moving towards withholding tax free pension investment in the EU it does need to borne in mind that local revenue authorities are sometimes reluctant to allow gross payment even when it is clearly provided for in a double taxation agreement.  (Switzerland is a good example of this that I’m hoping to come back to.)  Accordingly I would suggest insurance companies do everything possible to ensure they are in a good position if a foreign jurisdiction does question their right to a preferential withholding rate available for pension schemes.  Examples would include identifying any non - UK pension schemes in an institutional pension company and the impact they might have on treaty access, whether there is any shareholder seed capital in policyholder funds and any implications from limitation of benefits clauses in double taxation treaties.

Additionally neither treaty comes in to force until the necessary legislative procedures have been completed and the necessary legislative procedures can take a long time.  In the case of the UK and Belgium a protocol was signed on the 24th June 2009.  Clearly the necessary legislative procedures weren’t rushed as the protocol became operative on 1 January 2013.