Media Briefing Note: One Step Nearer to FATCA Exemption for UK Retirement Plans

LONDON, 31 July 2012 - The UK Government on 26 July published a Model Intergovernmental Agreement which makes it clear that the United States will treat specified retirement plans as deemed compliant FFIs or exempt beneficial owners for the purposes of FATCA.

Nicola Rondel, Senior Associate in Hogan Lovells' pensions team, said:

"The newly published UK/U.S. inter-governmental agreement brings us one step nearer to a FATCA exemption for UK pension schemes."


The Foreign Account Tax Compliance Act of 2009 (FATCA) was enacted by the U.S. to prevent offshore tax evasion by ‘U.S. persons’.  FATCA requires non-U.S. financial institutions (FFIs) to register with the U.S. Internal Revenue Service (IRS), perform due diligence to identify U.S. accounts and report client data to the IRS.  Any FFIs that do not comply face a 30% withholding tax on U.S. sourced income or payments.  The reporting requirements are onerous and will be costly.  However, FFIs must either comply with FATCA or, if they are not willing to do so, be subject to the withholding tax or exit the U.S. capital markets.

Draft regulations issued in March 2012 introduced two exemptions - the ‘certified deemed-compliant’ and ‘exempt beneficial owner’ exemptions - which were intended to cover FFIs viewed as being low-risk, such as non-U.S retirement schemes.  Unfortunately, it was not clear that UK retirement plans would fall within either of the exemptions.

Inter-governmental approach

On 8 February 2012, the U.S., UK and a number of other European countries including France and Germany announced their intention to adopt an inter-governmental approach with the intention of implementing FATCA and improving international tax compliance through domestic reporting and the reciprocal automatic exchange of information on accounts held in U.S. financial institutions, based on existing double tax treaties. 

It had not been clear how FATCA and the inter-governmental approach would work together in practice. 

Model Intergovernmental Agreement

On 26 July HM Treasury issued a joint statement with the governments of the United States, France, Germany, Italy and Spain announcing the publication of the Model Intergovernmental Agreement.  The statement notes that the UK Government has aimed to ensure that the burdens imposed on financial institutions are proportionate to the goal of combating tax evasion and that there is a wider scope of institutions and products effectively exempt from the FATCA requirements under the Agreement.

The Agreement makes it clear that the United States will treat specified retirement plans as deemed-compliant FFIs or exempt beneficial owners. This treatment will also extend to specified financial institutions.  Retirement plans will include an entity established or located in and regulated under UK law or a predetermined contractual or legal arrangement, operated to provide pension or retirement benefits or earn income for providing such benefits under UK law and regulated with respect to contributions, distributions, reporting, sponsorship and taxation.  This would include insurance companies to the extent they administer group and personal pension scheme arrangements and invest the assets of those arrangements. 

Although the retirement plans and financial institutions to which this will apply are still subject to bilateral consultation the basis upon which the terms of the Agreement have been negotiated strongly suggest that most retirement plans and insurance companies, at least to the extent they administer group and personal pension scheme arrangements and invest the assets of those arrangements, will be exempted as a result of the Agreement.

The UK has stated that it will conclude negotiations and sign the Agreement as soon as possible.  It will then consult on the implementation of the Agreement with interested parties.  Draft legislation will be published later in 2012. 

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