Pension Schemes and Double Taxation Agreements

A case that caught my eye  - Macklin 2013 TC 02943.

In summary the facts are as follows.  The tax payer was a domiciled in the UK, had worked for the World Bank in New York and on his retirement to the UK received a pension from the World Bank. The tax payer contended that the pension was tax exempt under article 17 of the UK/USA DTA.

The First Tier Tribunal (FTT) found that the World Bank pension was not a pension scheme under the terms of the UK / USA double taxation agreement as it was not "established" in the USA and it is a part of the definition of a pension scheme in the DTA that it is established in a contracting state.

Reading a summary of the case it seems the FTT took a "tough" line on what constitutes established but I think the decision clarifies a point that is relevant for institutional pension companies.

This point arises where an institutional pension company has a directly invested US fund that benefits from the 0% withholding rate available by virtue of the UK / USA DTA and associated competent authority agreement ("CAA") (see Philip's note of 16th April on the CAA).  

If there was a pension scheme from a third country that also had a 0% withholding tax rate for dividends paid to pension schemes in the relevant DTA with the USA it would seem that third country scheme could come into the existing UK pension fund and obtain the correct 0% withholding tax rate.  However, I think that technically the position is that the third country pension scheme is not a pension scheme under the terms of the UK / USA DTA as it is not established in either the UK or the USA. Accordingly, the UK pension company should not extend the 0% rate to the third country pension scheme, which is a pain as obviously the rationale of institutional pension schemes is to agglomerate pension assets.

This would be an area where a tax transparent fund ("TTF") would be useful as the transparent for income characteristic of the fund would allow third country pension schemes to enter the TTF and retain the benefit of their home country DTA with the USA.