Media Briefing Note: Workable FATCA exemption for UK pension schemes?

LONDON, 29 March 2012 - Hogan Lovells hopeful that UK pension schemes can rely on FATCA exemptions but clarification from the IRS would be helpful.


The Foreign Account Tax Compliance Act or "FATCA" is intended to target offshore tax evasion by US taxpayers.  It imposes a withholding tax of 30% on payments of US investment income (such as, for instance, dividends from US companies) made to any so-called foreign financial institution or "FFI" unless the FFI complies with significant due diligence, withholding, information reporting, and certification requirements.  There have been concerns that FATCA could have an adverse effect on UK pension schemes by treating them as FFIs and, therefore, bringing them within the scope of FATCA even though the US government had identified pension schemes as posing a low risk of tax evasion.  An exemption published by the US government last year generally did not work and the government was urged to re-think the scope of the proposed exemption.

Beneficial owners exemption

And it has done so, up to a point.  The US Treasury's proposed regulations published on 8 February 2012 provide an exemption from withholding in respect of payments beneficially owned by retirement plans that meet specified requirements. 

In order to fall within the exemption, a retirement plan must be (1) the beneficial owner of the payment, (2) established in a country with which the US has an income tax treaty in force, (3) generally exempt from income taxation in that country, (4) operated principally to administer or provide pension or retirement benefits, and (5) entitled to benefit under the income tax treaty on US-source income.

Whilst the exemption broadly describes a typical UK HMRC registered trust-based pension arrangement under UK law, trustees are usually regarded as the legal rather than the beneficial owners of trust assets, in which members have a beneficial interest.  This means that on a strict interpretation the exemption would not cover these schemes (or contract-based schemes). 

However, the same 'beneficial owner' description is used under the US/UK double tax treaty in relation to pension schemes.  In fact, the treaty goes further and treats not just pension schemes, but a fund, plan or arrangement to which an occupational or individual pension scheme contributes by paying premiums to an insurance company, as the beneficial owner of dividends paid to it by US corporations.  This indicates that HMRC and the IRS are prepared to adopt a wide interpretation of the term 'beneficial owner' in the context of international fiscal arrangements.  In view of this we are hopeful that pension schemes will be able to rely on the FATCA exemption, but clarification from the IRS on the scope of the exemption would provide much-needed certainty.

Alternative exemptions

Under the proposed regulations, a pension scheme may also qualify as exempt from FATCA (including by virtue of being a so-called “deemed compliant FFI”) if it were to satisfy one or both of two other sets of requirements.  Among other things, these separate exemptions require a pension scheme to accept only employer, employee and government contributions “limited by reference to earned income.”  However, given that, for many UK pension schemes, employer contributions will not always be limited in this way, it is not at all clear that a UK pension scheme would qualify under either of these separate exemptions. 

UK Government "FATCA" information powers

The UK is one of five governments that have issued a joint statement with the US announcing an intention to take a cooperative and “intergovernmental approach” to the implementation of FATCA. 

It is anticipated that FFIs (including presumably, UK registered pension schemes) organized in one of these five countries could, ultimately, be exempt from the FATCA obligations and instead would be subject to less burdensome obligations to report information directly to the relevant “domestic” government. 

The Budget delivered on 21 March 2012 noted that the UK Government will publish a discussion document before Summer 2012 on information powers to facilitate co-operation with the US in connection with FATCA.  The Government's intention is to include legislation in Finance Bill 2013. 

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