Whilst many people would regard an ARF as a pension fund, technically from a tax perspective an ARF is regarded as a ‘capital asset’ rather than a ‘pension’. Whilst this distinction may seem somewhat academic or akin to splitting hairs, whether it is a pension or a capital asset can have very significant tax implications for non-resident individuals that are in receipt of distributions from an ARF.
A distribution from an ARF is subject to Irish PAYE withholding tax - deducted and paid to Revenue by the Qualified Fund Manager (QFM) making the distribution. A non-resident individual would generally be subject to income tax in their jurisdiction of residence. Under the terms of most double taxation agreements, ‘pension’ income is taxable only in the jurisdiction in which the individual is resident for tax purposes. In the past, Irish Revenue had allowed for a refund of Irish PAYE for non-resident individuals in respect of distributions from ARFs where the individual could provide documentation proving that the distribution was being taxed in the jurisdiction in which they were resident (provided Ireland had a double taxation agreement with that jurisdiction).
The above treatment reflected a practical approach of Revenue, eliminating double taxation for individuals. Unfortunately however, since December 2017, Irish Revenue no longer apply this practical approach. Their commentary (reviewed October 2019) is set out below:
“Revenue had previously allowed on an administrative basis that the tax deducted by a QFM from an ARF distribution could be refunded where the taxpayer could demonstrate that the distribution had been taxed in the DTA country in which they were resident. However, as there is no legislative basis for this approach, it will no longer be permissible”.
The strict legislative approach is much more complicated as the Irish tax treatment of the ARF distribution has to be traced to the underlying income, gains or capital which it represents. If the income/gain is specifically exempt from Irish tax under the relevant article of the DTA, then any Irish tax withheld should be refundable. It is a very onerous task for individuals and fund managers to split the payments between the different sources of income and gains. An even harsher treatment arises in respect of distributions of the capital that was originally invested in the ARF. Revenue have stated that:
“Where a distribution involves the return of all or part of the original capital invested in an ARF, then, unless there is a capital article in the DTA, any Irish tax charge under Part 30 of the TCA 1997 that relates to a capital disbursement is not limited by the DTA”.
Unfortunately, the vast majority of double taxation agreements entered into by Ireland do not include a ‘capital article’. It should be noted that a ‘capital article’ is distinct from the ‘capital gains tax’ article. In instances where there is no capital article in the DTA, Revenue regard Ireland as having the right to tax the distribution of the capital amount. The amount of the distribution may also be taxable in the individual’s jurisdiction of residence as akin to pension income, leading to double taxation.
The above treatment is overly harsh and can be very distressing for pensioners who have moved abroad and wish to draw down from their ARF, which they regard as akin to a pension fund. The previous administrative approach by Irish Revenue was practical and applied the spirit of double tax agreements that Ireland has entered into. It is hoped that Revenue will reconsider their approach and we understand that submissions have been made to Irish Revenue to reconsider the treatment.
RBK can assist you with reviewing your pension and your funding options.
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