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Thursday, 25th April 2024 |
| Ireland’s Common Collective Fund |
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| The Common Collective Fund (CCF) is Dublin’s answer to part of the pan EU pension dilemma. It attempts to address some of the problems and costs faced by multinationals in organising group-wide pensions. However it is not, and does not pretend to be a pan EU pension fund. |
Pension diversity
From 1 May 2004 the EU will enjoy 25 pension regimes. Each member state has different rules governing pensions, both from the viewpoint of regulation and taxation. In the taxation area the rules differ on
• Deductibility of pension contributions by employer and employee
• Taxation of employee in respect of employers pension contributions
• Taxation of the pension fund on its income and gains
• Taxation of pensions paid from the fund.
There are some moves to attempt to create a single market across the EU for pensions. Member states have until 23 September 2005 to implement a recent EU directive. That directive aims to provide a legal framework for pan European pension plans. The directive is largely focused on organisational and regulatory matters relating to a pension fund or a pension provider. It does not particularly focus on the tax implications of a cross-border pension.
The European Court of Justice (ECJ) has shown interest in national rules relating to the tax treatment of pensions. In a case involving Skandia, it held that Swedish rules on cross border pension provision were contrary to EU law. Those rules discriminated between a situation where an employer paid contributions to a pension fund in Sweden, and where the contributions were paid to a pension fund established elsewhere in the EU. That discrimination was held to be illegal. Following on the Skandia decision, the EU Commission has initiated infringement proceedings against several EU member states and has challenged the Irish and UK pension systems also.
The Common Collective Fund does not attempt to tackle these areas of pan European regulation, or tax treatment of contributions to pension funds. Its focus is elsewhere.
What the CCF does
What the CCF attempts to do is to provide a facility whereby pension funds, potentially in several member states of the EU, may pool their resources to enable them to be commonly managed for investment purposes. The pooling of pension investments provides the obvious benefits to the pension funds of managing one large pool rather than many smaller discrete pools. Current tax rules in most member states make it difficult or expensive to fund a pension through a pension provider established in another member state. Until such time as the process of harmonisation described above produces results, which could be several years, the most that can be achieved is to ensure that the fragmented separate pension funds in each member state achieve the economies which common management of their investments can deliver. That is what the CCF facilitates.
The CCF is not an entity in itself. It is no more than a contractual arrangement whereby an investment manager and a custodian undertake to hold assets and to manage assets on behalf of pension funds who sign up to the CCF. The various pension funds who sign up to the CCF become co-owners of the pooled assets held by the custodian and managed by the investment manager. They own the investments held in the CCF as tenants in common. The contract is usually established by a unilateral deed executed under seal by the management company of the CCF and as such comes within Article 1 Para 3 of the UCITS Directive.
Irish taxation
Ireland has legislated for the tax treatment of a CCF. Subject to meeting certain conditions it is treated as transparent for Irish tax purposes. Accordingly foreign source income of the CCF accruing to foreign source unit holders in the CCF (the pension funds who contributed to it) is not subject to Irish tax nor is there any withholding tax on transfers from the CCF to the unit holders who are the beneficial owners of the CCF’s assets.
In its tax treatment, it is in many respects similar to a gross fund with zero Irish tax suffered on payments to the non-resident unit holders. However in principle it is not an fund entity per se but only a co-ownership of pooled assets.
UK aspects
The transparent status of the CCF can provide particular advantages to UK pension funds. At present many of them invest their resources into managed funds, which are separate entities. Such entities, if UK resident, typically suffer a 15p.c. (and in come cases up to 30p.c.) USA withholding tax on income payments from the USA. Had such payments been directly paid to the UK pension fund, the USA withholding tax, which is a dead cost, would be zero, eliminating an obvious and substantial performance drag. The Irish CCF, being transparent, leaves the pension fund as the direct beneficial owner of the underlying assets and income, and accordingly should be in a position to obtain a zero rate of withholding tax. This achieves a significant saving. This position has to should be checked out in each individual case and it is usually advisable to obtain a specific IRS IRS and Inland Revenue rulings on access to the UK/USA double tax agreement, given the potential sums involved.
International Aspects
The application of double tax agreements to a CCF is not solely a matter for the US treaty. Discussions have taken place with the tax authorities in several major economies to ensure that the transparent nature of the CCF, and the treatment of its unit holders as the beneficial owners of its assets, is recognised for treaty purposes. This is an area that needs careful examination in the context of the intended geographical investment strategy of any particular CCF, and in the context of the residence of its member pension funds. Recent publicity concerning the adoption of use by an IBM pension fund of an Irish CCF and other live cases expected soon, will undoubtedly give a boost to this vehicle in the international pensions arena. |
Paul McGowan is a tax partner and Ted McGrath is a tax director at KPMG.
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| Article appeared in the April 2004 issue.
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