OECD releases discussion draft on treaty residence of pension funds

OECD releases discussion draft on treaty residence

Proposals for changes to the OECD Model Tax Convention concerning the treaty residence of pension funds were released on 29 February 2016.

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On 29 February 2016, the OECD released for public comments a discussion draft that includes proposals for changes to the OECD Model Tax Convention concerning the treaty residence of pension funds. The discussion draft includes draft changes to Articles 3 and 4 of the OECD Model Tax Convention, and to the Commentary on these Articles, that will ensure that a pension fund is considered to be a resident of the State in which it is constituted for the purposes of tax treaties. The issue of whether a pension fund should be treated as a resident for treaty purposes was incorporated into the OECD’s base erosion and profit shifting (BEPS) project, in the work on Action 6.  

The final report on Action 6, released on 5 October 2015, suggested that recognised pension funds should be treated as residents for treaty purposes, and acknowledged that additional work would be required in the first part of 2016 to define a ‘recognised pension fund’.  The final report suggested that certain criteria would need to be met in order to be considered a ‘recognised pension fund’, including that the fund must be:

  • treated as a separate person under the taxation laws of that State; 
  • constituted and operated exclusively to administer or provide retirement or similar benefits; and
  • constituted and operated exclusively to invest funds for the benefit of entities or arrangements.

The OECD is seeking comments on the following questions:

  • As regards the phrase “that is treated as a separate person under the taxation laws of that State” included in the definition of “recognised pension fund” in proposed Art. 3(1) j): Does that phrase deal adequately with pension funds established in your State? If not, what other formulation would ensure that pension funds, the income of which is not otherwise attributed to another person for tax purposes, are treated as residents?
  • As regards the phrase “that is constituted and operated exclusively to administer or provide retirement or similar benefits” included in subdivision i) of the definition of “recognised pension fund” in proposed Art. 3(1) j): Is the word “exclusively” too restrictive given the normal operations of a pension fund? If yes, please describe the operations that might not be covered, taking into account the fact that the subparagraph refers not only to “retirement benefits” but also to “similar benefits”?
  • As regards the phrase “similar benefits” included in subdivision i) of the definition of “recognised pension fund” in proposed Art. 3(1) j): Are there examples of “benefits” that are typically granted by pension funds that would not be covered by the phrase “similar benefits”? If yes, please describe these benefits?
  • As regards the phrase “that is constituted and operated exclusively to invest funds for the benefit of entities or arrangements” included in subdivision ii) of the definition of “recognised pension fund” in proposed Art. 3(1) j): Is the word “exclusively” too restrictive given the normal operations of an intermediary that invests on behalf of pension funds and, in particular, the possibility that these operations would include activities that are not related to the investment of funds and the possibility that non-resident pension funds would be investing through such an intermediary? If yes, please describe the operations that might not be covered?

The OECD deadline for comments is 1 April 2016.

For further information please contact :

Dan Roman

Naz Klendjian

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