Media Briefing Note: New US withholding tax - overseas pension schemes may be caught
01 November 2010
LONDON, 1 November 2010 -
· These provisions introduce a withholding tax of 30% on payments such as dividends from US companies to foreign entities from 1 January 2013, unless the entity complies with onerous reporting requirements. This will affect some
· An exemption from the FATCA provisions has been suggested for foreign retirement plans; however the current drafting of the exemption would in fact exclude many
· The official deadline for comments to the IRS on FATCA is today (1 November) (although we understand that members of the European Fund and Asset Management Association ("EFAMA") have been given an extension until Monday 15 November).
Background: FATCA provisions
The FATCA provisions were introduced by the Hiring Incentives to Restore Employment Act of 2010. FATCA imposes a 30% withholding tax on payments such as dividends, interest and share proceeds from US entities to Foreign Financial Institutions ("FFI"s) unless the FFI agrees to comply with reporting and withholding requirements aimed at curtailing tax evasion by US citizens. An FFI is defined to include an organisation that "holds financial assets for the account of others". The IRS believes this can be read to include at least some foreign pension schemes, and has proposed an exemption for foreign pension schemes meeting certain conditions on the grounds that they pose a low risk of tax evasion.
However, the proposed pension scheme exemption is not wide enough to cover most UK pension schemes because it does not exempt schemes that allow participation by US persons (which would include any member or beneficiary who holds US citizenship) who do not work for the employer in the country in which the scheme is established. Few UK schemes could guarantee that no member that holds US citizenship would be seconded outside the UK, and it is even more unlikely that a UK scheme could ensure that all US beneficiaries (such as spouses) also work for the employer in the UK. Indeed, typically, a scheme administrator would not know about either the citizenship of members and beneficiaries, or necessarily where they are working.
The IRS requested comments on various aspects of FATCA in Notice 2010-60. Hogan Lovells has submitted a comment to the IRS and US Treasury pointing out that most UK pension schemes will not have a record of the citizenship of their members (much less beneficiaries) or know at all times where they are working. Moreover, it is unclear what such a requirement adds to the other aspects of the proposed exemption.
Hogan Lovells has proposed an alternative exemption resting on the foreign pension plan's tax status in the home country, and the existence of a tax treaty and information exchange between the
If the exemption is not broadened,
Penny Pilzer, Of Counsel at Hogan Lovells'
Kurt Lawson, Partner at Hogan Lovells'
"Employer-sponsored pension plans that are tax-approved in foreign jurisdictions are unlikely to be used for tax evasion. We believe that an exemption from the FATCA requirements is appropriate and hope that the government agrees."
+1 202 637 5660
020 7296 5799
020 7296 2780