A quick look at the September 2011 HM Revenue & Customs listing of Qualifying Recognised Overseas Pension Schemes shows somewhere in the region of 2,000 different schemes (albeit mostly occupational) from over 50 different countries which are recognised by HMRC as QROPS.
Regardless of whether one scheme allows for 100% commutation of all investment growth, or for 25% or 30% of the entire fund to be taken as a lump sum from the age of 50, a common link between all QROPS is that they are ‘recognised’ by HMRC and not ‘approved’ – as in reality, there is no such thing as an approved QROPS. Advisers should be cautious when listening to any claims to the contrary, as HMRC do not approve or authorise any QROPS.
So what steps need to be followed before a foreign pension scheme (i.e. one established outside the UK) can register itself for HMRC recognition as a QROPS?
The starting point
A foreign pension scheme will first of all need to be generally recognised by HMRC as a Pension Scheme (i.e. a scheme or arrangement providing benefits on retirement, death or incapacity) and will then need to fall within the definition of an “Overseas Pension Scheme” (OPS).
An OPS is a pension scheme established outside the UK which meets the requirements set out in the Pension Schemes (Categories of Country and Requirements for Overseas Pension Schemes) Regulations 2006 (SI 2006/206 as amended by SI 2007/1600).
The EU route to QROPS recognition (the first route)
As set out in SI 2006/206, to be an OPS a foreign pension scheme must be “recognised for tax purposes” in the jurisdiction in which it is established. An outline of the requirements for any scheme to be “recognised for tax purposes” is set out later in this article.
The regulations then provide that to be an OPS the foreign pension scheme must also be established in a country which regulates pension schemes and also regulates the scheme in question
A scheme which satisfies these conditions will automatically qualify as an OPS
and so will be capable of being recognised as a QROPS, if the scheme is established in an EU member state, Norway, Iceland or Liechtenstein
This is the clearest way in which a QROPS can be established as this route requires clear objective tests to be satisfied and does not rely on subjective analysis to be undertaken.
EU countries which qualify under this route who provide “third country” QROPS (i.e schemes open to local residents as well as to non residents) include Malta.
Malta worked with HMRC in the development of its local regulations to ensure that Malta satisfied UK requirements to enable individual schemes to be “recognised for tax purposes”.
http://www.mfsa.com.mt/Files/Announcements/PressReleases/Media%20Release%2006-2009%20Eng.pdf
This means a scheme which is published on the HMRC QROPS list and also appears on the Malta Financial Services Authority’s (the Maltese pension regulator) Registered Pension Scheme list must be a QROPS.
The Non EU route to QROPS recognition (the second route)
If a foreign pension scheme is established outside the EU, it may still qualify as a ROPS if (in addition to being “recognised for tax purposes”) the scheme is established in a country which has a pension regulator which also regulates the scheme in question, and
- which has a double tax treaty with the UK which contains provisions about exchange of information and non discrimination.
On the face of it the second route should provide non EU countries with domestic pension regulators that regulate each pension scheme with a fairly straight forward entry into the QROPS market as long as the tax treaty with the UK is a modern OECD model treaty.
Countries that would qualify under this route include New Zealand, although it is understood that draft legislation may restrict membership of New Zealand schemes to local residents, if passed in its present form. Even if a country has a modern OECD model tax treaty with the UK it is not always clear how any particular scheme satisfies the requirements for it to be “recognised for tax purposes” under the local tax legislation in the country in which it is established.
It is unlikely that foreign pension schemes established in countries with non OECD model tax treaties will satisfy the relevant tax treaty requirement, unless there have been amending protocols to provide for non discrimination and exchange of information/or tax information exchange agreements. In which case, the scheme in question will not be able to qualify as a QROPS via the second route.
This is the position, for example, in traditional “low tax” jurisdictions such as Guernsey, Jersey and the Isle of Man. While the treaties for these three jurisdictions predate the modern OECD model, it is apparent that there has been no appetite to amend or update the treaties to contain standard non discrimination provisions. An amendment to the tax treaty would enable the Isle of Man to qualify for recognition under the second route but Guernsey QROPS would still not be recognised down this route as schemes in Guernsey operate in an unregulated environment (i.e there is no pension regulator regulating individual schemes).
The Non EU/tax treaty route to QROPS recognition (the third route)
If a foreign scheme is unable to qualify as a ROPS using the second route, it may still be recognised as a QROPS if the scheme is “recognised for tax purposes” and the rules of the scheme provide:
- At least 70% of a member’s UK tax relieved scheme funds will be used to provide the member with an income for life, and
- Pension benefits payable to the member must not commence before the age of 55
A scheme established down this route may either be regulated or unregulated in the country in which it is established and its rules will need to comply with external UK tax requirements for it to be recognised as a QROPS. This is the most complicated way for a foreign pension scheme to be recognised as a QROPS and schemes established under the third route will require the most due diligence. In particular, scheme rules should be considered in light of the UK overrides and the manner in which the scheme operates should be able to be tested against the 70% rule, in that a scheme should be able to evidence that 70% of UK tax relieved scheme funds are used to provide members with an income for life.
Because foreign pension schemes established under this route will either be unregulated and/or, established in countries without modern OECD model tax treaties with the UK, it is likely HMRC wished to override local rules in order to control what a QROPS could do with UK tax relieved scheme funds.
It should be noted that the flexible drawdown rules introduced in the Finance Act 2011, Schedule 16 have not presently been extended to SI 206/2006 thereby resulting in any QROPS which is recognised under the third route to be less flexible than a UK registered pension scheme when it comes to drawing benefits as a pension. It should also be noted that the requirements set out above cannot be overridden where the member is resident outside the UK for five years or more.
Countries which qualify under this route include Guernsey and the Isle of Man.
The Guernsey tax treaty with the UK does not provide for non discrimination. In addition, Guernsey does not have a pension regulator, so all QROPS schemes operating from within Guernsey can be said to operate in an unregulated environment. The Isle of Man on the other hand has a pension regulator that regulates each scheme but is only let down in qualifying under the second route to QROPS recognition by its tax treaty with the UK not providing for non discrimination. Members of Isle of Man QROPS may therefore take comfort from the fact that Isle of Man schemes are regulated on an individual basis, whereas this cannot be said about schemes operating in Guernsey.
“Recognised for tax purposes”
It is outside the scope of this article to analyse in detail the requirements for a foreign pension scheme to be “recognised for tax purposes” but in brief a scheme will be “recognised for tax purposes” if both “primary conditions” are met and one of two secondary conditions are satisfied.
• Primary Condition 1 is satisfied where the overseas pension scheme is open to persons resident in the country where it is established
• Primary Condition 2 requires there to be:
– A system of personal taxation of personal income under which tax relief is available in respect of pensions (satisfied only where an exemption to taxation arises to the pension scheme as a direct result of the domestic tax legislation specifically recognising pensions), and
– For tax relief not to be available to the member on contributions made to the scheme, either by the member or by an employer of that member, or
– For all or most of the benefits paid by the scheme to members (excluding benefits paid in respect of ill health) to be subject to taxation.
“Onshore v offshore”
It can be seen from the above analysis that any pension scheme which qualifies for QROPS recognition through the first route or the second route by:
• Being established in an EU Member State, or
• being established outside the EU in a country with a pension regulator and an appropriate tax treaty with the UK
will be subject to the local domestic pension legislation free from any interference from UK tax regulation. Any QROPS recognised through these routes can be regarded as an “Onshore” scheme.
All other QROPS, regardless of whether they are regulated or unregulated in the country in which they are established will still be subject to local pension legislation (if any exists) and will also be subject to interference from UK tax regulation. In this case the 70% rule and minimum pension age rule described above will apply. Any QROPS recognised through this route can be regarded as an “offshore” scheme.
Recently there has been talk of Jersey entering the “third country” QROPS market. While Jersey features on the HMRC QROPS list, all schemes presently recognised as QROPS are for Jersey residents only. This is because tax legislation in Jersey does not allow for a third country scheme to be “recognised for tax purposes” and also there is no pension regulator.
It will be interesting to see the basis upon which Jersey eventually enters the third country QROPS market (if at all), as, in common with other low tax jurisdictions, Jersey does not have non discrimination provisions in its tax treaty with the UK. This means even if Jersey was to establish a pension regulator which would regulate each scheme and update its tax legislation, it will still be operating in exactly the same space as the other Crown Dependencies. All jurisdictions who wish to adopt or adjust their tax legislation and/or regulatory framework to enter the QROPS market should carefully consider the way in which QROPS qualification criteria is achieved.
