PTM112200 - International: qualifying recognised overseas pension schemes (QROPS): what is an overseas pension scheme
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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.
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.
Schemes set up by an international organisation
The following guidance relates to the conditions in place from 6 April 2017. For guidance on the conditions in place before that date see the guidance on the National Archives.
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.
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, and
- 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.
The ‘Regulation Requirements Test’
The following guidance relates to the conditions in place from 6 April 2017. For guidance on the conditions in place before that date see the guidance on the National Archives.
Overseas public service pension schemes (see PTM112300 for definition) and a pension scheme set up by an international organisation to provide benefits to or in respect of their employees do not need to meet the conditions of this test. (Technically the legislation says overseas public service pension schemes are deemed to satisfy the regulatory requirements test. Whereas for schemes set up by international organisations for their employees the legislation the regulatory requirement test does not form part of the condition that need to be satisfied for the scheme to be an overseas pension scheme. The practical effect is the same; these schemes aren’t affected by the regulatory requirements test.)
This test looks at whether or not and how a pension scheme is regulated. 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.
How a scheme can satisfy the regulatory requirements test depends on whether or not the scheme is an occupational pension scheme. An occupational pension scheme is a scheme established by an employer to provide benefits for, or in respect of, 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.
Occupational pension schemes
If there is a regulator of occupational pension schemes in the country or territory in which the scheme is established, the scheme must be regulated by that regulator. If 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).
If there is no regulator of occupational pension schemes, the occupational pension scheme will satisfy the regulatory requirements test.
Non-occupational pension schemes
If there is a regulator of non-occupational pension schemes in the country or territory in which the scheme is established, the scheme must be regulated by that regulator. If 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.
If there is no regulator of non-occupational pension schemes in the country or territory in which the scheme is established, the scheme may still satisfy the regulatory requirements test if it is established in an EU member state, Norway, Liechtenstein or Iceland.
If the scheme is not established in an EU member state, Norway, Liechtenstein or Iceland and there is no regulator of non-occupational pension schemes in the country or territory in which it is established, it may be able to satisfy the regulatory requirements test if there is a regulator of the scheme establisher/provider (a financial services regulator). If there is a financial services regulator a non-occupational pension scheme may still satisfy the regulatory requirements test if the pension scheme provider is regulated. To satisfy the test the scheme provider must be regulated by the financial services regulator for the purpose of establishing the pension scheme. This is similar to the position for non-occupational schemes in the UK where the scheme provider is regulated by the financial services regulator and that it is regulated for the activity of setting up and running the pension scheme.
If the scheme is not set up in an EU member state, Norway, Liechtenstein or Iceland and either:
- there is a financial services regulator, but the scheme provider isn’t regulated, or
- there is no financial services regulator
the scheme does not satisfy the regulatory requirements test. The scheme cannot be an oversea pension scheme. If a scheme cannot be an overseas pension scheme it cannot be a recognised overseas pension scheme or a QROPS.
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:
- 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
- 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
- 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.