Much has been written over the last five years about the benefits of QROPS and the various jurisdictions offering them, how some are successful and some not so.
However, as the market for QROPS has evolved and expanded, and as the bigger issues concerning jurisdiction have been highlighted by various tax authorities around the world, including the OECD. Advisers increasingly must consider which is the best jurisdiction from a tax point of view, as well as a regulatory one, when advising clients on QROPS.
Most, though not all, jurisdictions allow payment of any commutation (typically 25%-30%) to be paid with no withholding tax, while income is also typically paid gross to a member. Much is made of this in promotional literature distributed by various QROPS providers. But what is rarely discussed in open forum is how benefit payments are treated in the country in which the member is tax resident, and how the underlying contract is looked upon from a tax perspective.
The question we must ask ourselves is this: at a time where major economies are suffering severe financial crises, and looking for ways in which to re-build their finances, is it advisable for clients and their advisers to rely upon the belief that, just because something has not been challenged in the past, it will not be done in the future? Ireland, for example, has recently imposed a new tax (temporarily) upon the asset value of their pension funds, and reduced the ‘fund cap’ substantially.
The majority of QROPS are set up under a trust deed with independent trustees responsible for the implementation of the deed and its accompanying rules, with the member as the beneficiary. This would therefore indicate that such a structure might be treated as a trust in a beneficiary’s tax jurisdiction in the absence of a Double Tax Treaty (DTA) recognising officially the underlying structure as a pension fund. While at first glance this might not seem substantive, it might well become important to the beneficiary who is in receipt of, or entitled to, payments from such a structure.
Certain jurisdictions give preferential tax treatment to income paid from a pension or a pension annuity. In some countries such as Spain, the definition of a pension annuity is somewhat blurred and different local tax inspectors will have a different view.
However, if a Spanish tax resident beneficiary for example, can convince his local tax inspector that income from his QROPS is an annuity, there are substantial savings to be had. If the underlying QROPS contract is viewed just as a trust, without the legal standing granted to it through a bilateral DTA, clients and their advisers may be taking an unnecessary risk, particularly when such a contract is available through an EU member state, which the Spanish tax authorities are obliged to recognize.
Advisers should also be aware that other jurisdictions within Europe will treat QROPS very differently.
This is French family office, Anthony & Cie’s take on how the French authorities may interpret QROPS:
France interprets temporary annuities as not being subject to tax. Subject to due diligence, a QROPS could be reviewed in a similar manner as to that of Spain, provided the pension is managed by an approved pension plan as, in accordance with European Union Law, it is difficult for the French tax administration to argue with the validity of the pension plan despite it being managed by a trust company. It is important to note that capital lump sums distributed will be considered as taxable revenue. An annuity created in France by way of a transfer could be considered to be a distribution of the original pension plan.
The application of the pension funds should conform with the domestic legislation of the European member state. The non respect of the application of the invested transferred funds in the QROPS could be deemed to be a sham thereby being deemed a taxable distribution.
The application of the pension funds should conform with the domestic legislation of the European member state. The non respect of the application of the invested transferred funds in the QROPS could be deemed to be a sham thereby being deemed a taxable distribution.
QROPS is relatively new legislation and to protect a tax payer it is important in France to be protected by EU law. A transfer outside the EU could be considered as income. The QROPS legislation in Malta is an advantage to a French resident as it takes advantage of treaty protection and minimises UK taxes on death.
Advice from a properly qualified French tax firm is imperative.
Much has been made of the volume of business going to each of the established QROPS jurisdictions as if this was some sort of justification for their use. The offshore jurisdictions were first into the QROPS market and have spent the last five years trying to find ways to improve their offerings – increasing commutation entitlements from 25%-30%, the 50c legislation in Isle of Man, and new pension rules in Gibraltar, are all examples.
Again, the question is whether, in these financially uncertain times, when tax authorities are looking to maximize revenue, particularly for those clients in sophisticated tax collecting countries – is using an offshore solution always the best way forward?
QROPS, as most people are now waking up to, are not ‘approved’ by HMRC, merely ‘recognized’ as a statement of fact based upon an application made to it for a QROPS reference number. The only guarantee of the underlying status of the QROPS, and its acceptability to HMRC, will be if the pension fund is properly regulated by the right authorities in a country which has a suitable bilateral tax treaty with the UK.
At this turn it is interesting to consider where Malta fits into the QROPS landscape.
Malta may be relatively new to the QROPS market, but I believe it is now time for advisers to look at the underlying regulatory certainty, and the tax treaty protection offered by Malta in comparison with other off-shore commercial centres.
In Malta, the MFSA regulate pensions as a specific activity, which means every individual pension fund and its administrator are specifically licensed. A list of these is available on the MFSA website, along with the regulations governing such pension funds.
Furthermore, Maltese domestic pensions’ legislation is very similar to that in the UK, unlike other jurisdictions where there is either limited legislation, an unenforceable ‘code of conduct’, or other non-binding agreements intended to prevent the abuse of HMRC requirements.
Historically off-shore jurisdictions were considered the only place in which QROPS for non-residents could be set up – but these carry uncertainty over domestic rules and even whether the underlying contract had any legal recognition. Malta, on the other hand, can now offer the same tax benefits with the certainty of HMRC approval and tax treaty protection – the jurisdiction currently has 58 double taxation treaties in force, including with all EU countries.
Finally, as an EU member state, and with the 58 tax treaties mentioned, Malta can offer investors certainty, as HMRC cannot legislate currently or retrospectively against the pension rules of another EU member state.
