Pension Business, Double Tax Treaties and Exempt Dividends

The definition of a pension scheme in a double taxation agreement will generally include a requirement that income accruing to the scheme is exempt from tax.  Taking the Japan / UK treaty as an example

"Exempt from tax in that Contracting State with respect to income or gains derived

from activities described in clause (ii) of this subparagraph."

It always seemed to me that there is a risk that there may be confusion over pension business policies of a life insurance company when this wording is read in conjunction with FA 2012 section 111

"Dividends or other distributions–

(a)which are receivable by the company, and

(b)which are referable, in accordance with Chapter 7, to the business concerned,

are to be brought into account as receipts in calculating the profits"

Of course if you happen to deal with UK life insurance companies and their pension business policies then it is clear that in terms of a double taxation treaty section 111 does not mean that the pension scheme is not exempt from tax. There is no "policyholder" tax charge on the dividend and although policyholder dividends are included in the calculation of shareholder profits they are matched by an equal and opposite movement in reserves.  However, I think a non  - UK revenue authority looking at the eligibility of a UK insurance company to a special pension scheme rate of withholding is going to take a lot of convincing.

Prior to Finance Act 2012 there was section 438 ICTA 88 that provided for exemption from corporation tax for income and gains solely linked to pension business.  But this section was not replicated in the FA 2012 regime.  I can understand the reasons for not replicating 438 (it didn't really link into any other legislation) but I am concerned that this issue of exempt dividends might cause problems in the future.

If it was up to me I would introduce a FA 2012 111A, that said that notwithstanding FA 2012 111 dividends and gains from unit linked pension business were exempt from tax, including calculations of life assurance trading profits.  But that where such amounts were exempted in the trade profits calculation an equal and opposite adjustment is made in the movement on reserves line.  A bit fussy maybe but I think may save a lot of complications in the long run.