IRELAND - Billions of euros destined to be placed in an Irish common contractual fund (CCF) vehicle will stay in the UK, following a little noticed change in a bilateral US/UK tax treaty.
The treaty, signed in 2001, exempted pension funds with segregated portfolios from paying withholding tax on returns from US investments.
However pension funds with pooled arrangements, which are classed as financial products, continued to attract the tax at a rate of 15%.
This meant that large UK insurers that manage pension funds were still liable to pay US withholding tax.
The treaty was amended earlier this year to remove this anomaly. A ‘competent authority agreement’, issued in April, broadened the definition of pension schemes that are treated as beneficial owners of dividends paid to them by US corporations.
Such pension schemes now include UK resident unit trusts, and funds to which pension schemes contribute by paying premiums to an insurance company.
The agreement means most investment funds that insurance companies manage on behalf of pension trustees will receive dividends on US investments free of taxation.
The change to the treaty follows plans by Legal & General to transfer €8bn of assets into a Dublin-based CCF.
CCFs are tax-transparent vehicles, similar to Luxembourg’s Fonds Commun de Placement (FCP), which enable pension funds to be taxed as segregated funds in spite of the fact that they are within a pooling vehicle.
As a result they are exempt from the 15% withholding tax on US equity dividends.
Legal & General gained authorisation for a CCF in January. Following the change to the treaty it will not now transfer UK assets to the vehicle.
Gavin Bullock, tax partner and head of pooling at Deloitte & Touche, said: “The importance of the competent authority agreement is that it was very debatable whether life funds had access to the treaty themselves prior to the agreement being issued.
“What it means is that certain life insurance companies, provided they meet a number of conditions, will qualify as pension funds under the treaty and as such is entitled to the nil rate of withholding tax.”
Bullock said the CCF and FCP would still be attractive to some financial institutions. “Life insurance companies that don’t meet the quite stringent conditions that are required for them to be treated as pension funds under the UK/US treaty may need to restructure so that they do meet the conditions or they may need to use a CCF.”
Leading US custodian banks, including State Street, Northern Trust and Citigroup have developed CCFs in Ireland with strong encouragement from the Irish government.
John Fitzpatrick, director of product development at Northern Trust, said he was “not aware of any change in tax regulations which would impact negatively on the CCF”.