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HMRC internal manual

Pensions Tax Manual

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International: qualifying recognised overseas pension schemes (QROPS): what is an overseas pension scheme

Glossary PTM000001
   

 

Section 150(1) and (7) Finance Act 2004

Regulation 2 The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 - SI 2006/206

A scheme will be an overseas pension scheme, if it is a pension scheme that is not a registered pension scheme and all the following apply:

  • it is established outside the United Kingdom
  • it satisfies The ‘Regulation Requirements Test’ , and
  • it satisfies the ‘tax recognition test’ in the country or territory in which it is established.

The last two conditions do not have to be met by a scheme if it is set up by an international organisation - see Schemes set up by an international organisation below. There are alternative requirements for these types of schemes.

Country of establishment
Schemes set up by an international organisation
The ‘Regulation Requirements Test’ 
The ‘Tax Recognition Test’

Country of establishment

Normally, a scheme will be treated as established in the country where its registered office is and main administration is carried out. If there is no registered office, then the location where its main administration is carried out will guide matters.

The scheme’s location of main administration is where the scheme’s decisions are made. In the case of a trust-based scheme, that would normally be determined by reference to where the scheme trustees are resident as that is where the decision-making responsibilities in respect of the scheme will lie.

It should be noted that the country in which a scheme is established may change if the location of the main administration and decision-making changes. In such a case, the scheme manager would have to revisit whether the scheme still meets the requirements to be an overseas pension scheme. The scheme manager is the person or persons administering, or responsible for the management of the pension scheme.

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Schemes set up by an international organisation

Regulation 2(5) The Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes and Recognised Overseas Pension Schemes) Regulations 2006 - SI 2006/206

An ‘international organisation’ is an organisation to which section 1 of the International Organisations Act 1968 applies by virtue of an Order in Council under subsection (1) of that section. This category includes, for example, the United Nations and the European Union.

Multinational companies that operate or have subsidiaries in several countries are not ‘international organisations’ for the purposes of these regulations.

A scheme established by an international organisation can be classed as an overseas pension scheme if:

  • it is a pension scheme that is not a registered pension scheme
  • it is established outside the United Kingdom,
  • it is be established for the purpose of providing benefits for, or in respect of, past service as an employee of the international organisation in question,
  • its rules provide that at least 70 percent of a member’s ‘UK tax-relieved scheme funds’ will be used by the scheme manager for the purpose of providing the member with an income for life, and
  • the pension benefits payable to the member under the scheme (and any lump sum associated with those benefits) must be payable no earlier than normal minimum pension age (see PTM028000) unless the member is retiring on the grounds of ill-health.

‘UK tax-relieved scheme funds’ means the total of the member’s UK tax-relieved fund and their relevant transfer fund. Those terms are explained in PTM113210.

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The ‘Regulation Requirements Test’

This test looks at whether or not there is a body in the other country which regulates pension schemes. The legislation looks for the actual regulation of a pension scheme and not just regulation of, say, pension providers or trustee companies. The test is aimed at identifying a regulator in the other country that oversees legislation/guidelines that impacts directly on the operation of the pension scheme, to ensure that pension schemes are administered soundly in order to protect members’ interests.

Regulation tends to vary from country to country but such regulation might extend to submitting accounts, investment guidelines, rules on trustees, etc. In considering this test, HMRC would expect the scheme to be fully subject to the regulation in that country that covers these aspects. If a pension scheme is regulated but then opts out of the regulation so that it is exempt from providing some or all of the information that other regulated pension schemes are required to provide, it cannot meet this test.

It may be necessary to identify whether the scheme is an occupational pension scheme or some other type of pension scheme. An occupational pension scheme is a scheme established by an employer to provide benefits for its own employees, although it may also admit other types of members. For example it may also admit employees of other companies within the same group.

The ‘regulation requirements test’ is met if any one of requirements A, B, or C is satisfied.

Regulation requirement A (occupational pension schemes)

This requires that:

  • the scheme is an occupational pension scheme,
  • there is in the country or territory in which it is established, a body which regulates occupational pension schemes and,
  • the scheme is regulated by that body.

If there is a regulator of occupational pension schemes in the country or territory in which the scheme is established and the occupational pension scheme is not regulated then it cannot be an overseas pension scheme. It is not open to the scheme to meet the requirement in another way. If a scheme cannot be an overseas pension scheme it cannot be a recognised overseas pension scheme or a qualifying recognised overseas pension scheme (QROPS).

Regulation requirement B (non-occupational pension schemes)

This requires that:

  • the scheme is not an occupational pension scheme,
  • there is in the country or territory in which it is established a body which regulates pension schemes other than occupational pension schemes, and
  • the scheme is regulated by that body.

If there is a regulator of non-occupational pension schemes in the country or territory in which the scheme is established and the non-occupational pension scheme is not regulated then it cannot be an overseas pension scheme. It is not open to the scheme to meet the requirement in another way. If a scheme cannot be an overseas pension scheme it cannot be a recognised overseas pension scheme or a QROPS.

Regulation requirement C (no regulator)

A scheme can only be considered under regulation requirement C if:

  • the scheme is an occupational pension scheme and in the country or territory in which the scheme is established there is no regulator of occupational pension schemes, or
  • the scheme is not an occupational pension scheme and in the country or territory in which the scheme is established there is no regulator of pension schemes that are not occupational pension schemes.

If there is a regulator for the type of scheme in the country or territory in which the scheme is established then a scheme cannot be considered against regulation requirement C. Where there is a regulator for the type of pension scheme, the scheme must be regulated to be an overseas pension scheme.

If there is no regulator for the type of pension scheme then to meet the conditions of regulation requirement C one of the following conditions must be met:

  • the scheme is established in another member state of the European Union, or in Norway, Iceland or Liechtenstein; or
  • the scheme’s rules provide that at least 70 percent of a member’s ‘UK tax-relieved scheme funds’ will be designated by the scheme manager for the purpose of providing the member with an income for life. The pension benefits payable to the member under the scheme (and any lump sum associated with those benefits) must be payable no earlier than normal minimum pension age (see PTM028000) or when the member is retiring earlier due to ill-health.

In many cases, ‘UK tax-relieved scheme funds’ will simply mean the sums and assets that have been transferred from a registered pension scheme to a QROPS. However, the term actually has a wider definition; ‘UK tax-relieved scheme funds’ means the total of the member’s UK tax-relieved fund and their relevant transfer fund. Those terms are explained in PTM113210.

The expression ‘income for life’ is not defined in tax legislation. It takes its ordinary meaning. It does not mean that an annuity has to be provided. Rather the context resonates with the definition of lifetime annuity in the tax rules (paragraph 3(1)(c) of Schedule 28 Finance Act 2004), where one of the criteria is that:

‘it is payable until the member’s death or until the later of the member’s death and the end of a term certain not exceeding ten years’

For example, HMRC would not consider a payment to be made as part of an income stream for life, if 50 per cent of the fund was paid out one year and the other 50 per cent in the following year.

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The ‘Tax Recognition Test’

The pension scheme needs to be ‘recognised for tax purposes’ under the tax legislation of the country or territory in which it is established. This requirement is met if all the following three conditions are met:

Tax recognition condition 1

The scheme must be open to persons resident in the country or territory in which it is established.

HMRC’s view of this condition is that membership of the scheme should be genuinely available to residents of the country or territory in which it is established. If there are membership criteria, it would be of concern if these only applied to residents of the country of establishment.

If a scheme is designed to have only one member the ‘open to residents’ requirement means that only residents of the country or territory in which it is established can join single member schemes.

Tax recognition condition 2

There must be a system of taxation of personal income in the country or territory where the scheme is established. Under this system of personal taxation, tax relief must be available in respect of pensions. In addition under this system of taxation one of the following conditions must be met in relation to pension savings:

  1. tax relief is not available to the member on their own contributions or, if they are an employee, by their employer (in respect of earnings to which benefits under the scheme relate), or
  2. the scheme is liable to taxation on its income and gains, and is a complying superannuation plan as defined in section 995-1 (definitions) of the Income Tax Assessment Act 1997 of Australia, or
  3. all or most of the benefits paid by the scheme to members who are not in serious ill-health are subject to taxation.

In this context tax relief includes the grant of an exemption from tax.

If the tax regime of the country or territory does not tax personal income, then schemes based in that country or territory cannot be an overseas pension scheme as condition 2 cannot be met. Also if benefits are taxed at 0% then all or most of the benefits will not be considered to be subject to taxation.

It is necessary for the country or territory (as part of its tax regime for taxing personal income) to give some tax relief incentive in respect of pensions. The tax relief that is referred to here (and which is considered under (1)-(3) above), must be specifically in respect of pension savings. Given the regulation requirement above (see The ‘Regulation Requirements Test’ above), and the other conditions, it follows that the test cannot be met by some other form of tax-advantaged saving product in the scheme-country that is not a pension scheme, but is simply capable of being used to pay out pension savings on retirement.

Unless the scheme is an Australian superannuation plan to which tax recognition condition 2 - bullet (2) above applies, looking at the treatment of contributions to / or benefits from the scheme (in the country or territory where the scheme is established), one of the following statements must be true:

  • tax relief is not available to the member on contributions made to the scheme by them or by their employer, or
  • all or most of the benefits paid by the scheme to members (who are not in serious ill-health) are subject to taxation.

So tax relief, or an exemption from tax, either applies at the point money goes into the scheme as a contribution, or the point it leaves as a benefit payment. It cannot be exempt at both of these points. Either the contribution into the scheme or most of the benefit payments out of it (excepting serious ill-health benefits) must be taxable.

Any serious ill-health provision (bullet (3) in condition 2) under the pension tax regime of the country or territory in which the scheme is established must reflect the provision applying in respect of a member of a registered pension scheme. The provision does not have to apply the same conditions as are set out in PTM063400, but the approach must be fundamentally similar in order for the requirement (in bullet (3) of condition 2) to be met.

Tax recognition condition 3

The pension scheme must be approved or recognised by, or registered with, the relevant tax authorities as a pension scheme in the country or territory in which it is established.

This condition is based on the country or territory in which the scheme is established, having some sort of mechanism for identifying which pension schemes can qualify for the tax relief that is available in the tax system there (see condition 2 above). The words ‘approved’, ‘recognised’ and ‘registered’ should be read accordingly. In the United Kingdom, tax reliefs are available in respect of ‘registered’ pension schemes. In other countries, the tax legislation may use the concept of approval or some other form of recognition.

The scheme will satisfy condition 3, if it is accepted by the tax authority of the country in which it is established, as being such a pension scheme.