QROPS for US tax payers

US tax payers that have UK pensions often get annoyed that the UK 25% tax free lump sum is taxed in the US. Some companies are now advertising a Qualified Recognized Overseas Pension Schemes (QROPS) in Malta that will allow a 30% Maltese and US tax free lump sum distribution because of the favorable wording in the new US/Maltese tax treaty, Article 17. Pensions etc. The QROPS is recognized by HMRC, but not the IRS and I wonder whether the IRS would see the transfer of the UK pension to a Maltese scheme as a taxable event because the transfer was to a scheme outside of the UK?

newcomer link: http://www.irs.gov/pub/irs-wd/11-0096.pdf [nonactive]

Thank you.....I vaguely remember this memo. It's obviously right to the point and on it's basis I would not do a UK to Malta QROPS if I was a US citizen or US resident tax payer. I'll post the link to the IRS letter on the "other" forum......

I'm a dual US/UK citizen. If I understand this memo correctly, does it mean if I return to live in the US and transfer my UK pension to Malta, it would count as a distribution and thus be taxed in the US?

I'm a dual US/UK citizen. If I understand this memo correctly, does it mean if I return to live in the US and transfer my UK pension to Malta, it would count as a distribution and thus be taxed in the US?

No, it means that there is a possibility that the IRS might see the QROPS transfer as a taxable event. Also, as a US citizen, it wouldn't matter where you were living.

No, it means that there is a possibility that the IRS might see the QROPS transfer as a taxable event. Also, as a US citizen, it wouldn't matter where you were living.

I'm a dual US/UK citizen. If I understand this memo correctly, does it mean if I return to live in the US and transfer my UK pension to Malta, it would count as a distribution and thus be taxed in the US?

In pragmatic terms, nun, what's the difference between the transfer possibly being viewed by IRS as " a taxable event" as opposed to whether it would "count as a distribution"?
What's a "taxable event" ....and how does it differ from "a distribution"?

In pragmatic terms, nun, what's the difference between the transfer possibly being viewed by IRS as " a taxable event" as opposed to whether it would "count as a distribution"?
What's a "taxable event" ....and how does it differ from "a distribution"?

The distribution is the taxable event. It depends on whether the IRS sees the transfer of money from a UK pension to one organized in Malta as a tax free "roll over" or a distribution of the money that would be taxed as income. It's well explained in the IRS letter.

FYI here are some IRS letters that address cross-border pension transfers. The first one explains why a UK pension cannot be "rolled over" to a US qualified pension.

http://www.irs.gov/pub/irs-utl/am2008009.pdf

The next one specifically addresses a UK to Malta pension transfer and concludes that it might well be a taxable event because it is a cross border transfer.

http://www.irs.gov/pub/irs-wd/11-0096.pdf

The final one talks about a SIPP transfer and also states that

A plan, scheme, fund trust or other arrangement established in a third country will thus not be considered a pension scheme for purposes of Article 18(1).

http://www.irs.gov/pub/irs-wd/10-0151.pdf

From all this it seems to me that a QROPS transfer does not receive any treaty protection from the taxation of income or gains. If it is to be US tax free you'd have to rely on US tax rules to achieve that without any modification from the tax treaty.

IRS commentary is interesting but technically does not have substantial authority.

Section 402(b) might give a US person a good amount of basis in much of the rollover; so reducing the US income tax exposure. What exists after in the Malta QROP might be a foreign grantor trust.

The NIIT position is separate and also needs addressing.

IRS commentary is interesting but technically does not have substantial authority.

Section 402(b) might give a US person a good amount of basis in much of the rollover; so reducing the US income tax exposure. What exists after in the Malta QROP might be a foreign grantor trust.

The NIIT position is separate and also needs addressing.

Agreed, which makes the "US tax free" nature of the "rollover" claimed by QROPS companies a bit problematic, IMHO. A US citizen or resident doing a QROPS is stepping into a complicated and potentially expensive area of taxation particularly with the greater interest of the IRS in foreign assets. The downplaying of this by QROPS companies is worrying.

I would like to comment on one aspect of Nun’s question of 27 September, namely “the QROPs is recognised by HMRC”.

This may be correct.  However, it is subject to a crucial caveat.  The full statement from HMRC can be read on their website at
http://www.hmrc.gov.uk/pensionschemes/transfers-to-qrops.pdf
but it simply means that QROPs may be listed by HMRC but it does not follow that HMRC cannot later challenge the scheme – and impose a 55% tax charge.  Caveat emptor!

FYI here is a reply I got from one QROPS company when I asked whether the IRS UK/Malta pension transfer letter was an indication that a QROPS transfer would be US taxable. The non-taxable argument seems to rely on the transfer going directly between trustees.....much as is the case with a 401k to IRA rollover. I'm dubious.

Thanks for your reply and the IRS link. I have seen this 2011 letter many times. As it states – it is not a ruling. In my many years of experience with pension transfers exported from UK to a QROPS I have never encountered a challenge or demand for tax by the IRS on such an event. It would not make sense. The beneficial owner who resides in USA is not in control of the pension fund. It is controlled by trustees who are not resident in USA. The transfer itself does not distribute any benefit to the person named as the beneficial owner. The transaction of the transfer is between two non-US-resident pension providers. Therefore there is no chargeable event. As the letter states, only distributions from a pension to its beneficiary are taxable. Expert opinion in UK now supports this view. Both UK and Malta – having separate treaties with USA - are classed as Contracting States.

It’s entirely up to you – but I see no reason to deter you from a QROPS as long as it complies with US regulations and reporting requirements.

I have read the IRS letter. This letter was dated 2011. Given this the IRS would never have heard of a QROPS. Let alone know how it works.

It states that a transfer from a UK pension scheme to a Malta pension scheme “COULD” be treated as a distribution that would be subject to taxation as income of the individual under paragraphs 1 and 2 of Article 17 of the U.K. Treaty.

However this is based on premise that the transfer were to a pension scheme established in a third country, instead of to another pension scheme established in the United Kingdom.

It is assuming a simple transfer from a UK pension scheme to a Malta pension scheme.

However this is not the case. A transfer to a QROPS is not a transfer to a Malta pension scheme.

In law it is a transfer to a pension scheme established by the UK, in UK pension legislation. It is not in the hands of pension legislation of the country the Trust is in, as we have seen with the case of Australia. The UK has delisted all QROPS schemes. Proving beyond doubt that a QROPS is a UK pension, controlled by UK pension legislation.

QROPS only exist in UK law. Established by UK pension legislation, and subject to changes in UK pension legislation.

The clue is in the title. “Q” is for Qualifying. A QROPS is a qualifying pension in UK law. A QROPS only exists in UK law. A QROPS is only a QROPS if HMRC says it is.

Given this it is covered by the UK / USA DTA.

Many tax lawyers in the USA now agree. The only people who do not are ones that look at the issue superficially. Yes it is a complicated subject. But when considered on points of law. A QROPS is established in UK pension law, and only exists in UK law.

A QROPS is a UK pension with assets held overseas. 

While I am not sure that U.S. tax can be avoided on a transfer from a UK pension to a QROPS, I think that the argument that the "transfer [is] going directly between trustees" is better than the argument that a Malta pension is really a UK pension.

If the QROPS is not a Malta scheme then I assume the US/Malta treaty does not apply and neither does the lump sum Maltese treaty provision.

So if the UK treaty applies we are left with the usual arguments against QROPS for US residents....ie expense and poor investment choices.


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