Case: Inability to register German public service pension fund breached free movement of capital

[2019] UKFTT 0129 (TC)

Judge Greg Sinfield

Decision released 22 February 2019

Income tax – Finance Act 2004, s. 186 - Relief from tax on income derived from investments held for purposes of registered pension scheme – Whether German pension scheme deemed to be registered scheme or eligible to register – Whether registration restriction on movement of capital contrary to Treaty on the Functioning of the European Union 2008 (TFEU), art. 63

BAV-TMW-Globaler-Immobilien Spezialfonds [2019] TC 06995

Summary

The appellant, BAV-TMW-Globaler-Immobilien Spezialfonds (BTI) was a German open-ended real estate investment fund whose ultimate beneficial owner was Bayerische Ärtzeversorgung (BÄV), an incorporated pension scheme which provided retirement benefits for doctors, dentists and vets practising in Bavaria and certain other German federated states. BÄV was established in 1923 by legislation passed by the Bayerische Landtag (Bavarian Parliament). BÄV invested in BTI via an investment fund (Masterfund).

BTI held two UK investment properties from which it received rental income. BTI and Masterfund were tax transparent under German law so BÄV was entitled to the income from the UK investment property as it arose. As BÄV was not a registered pension scheme in the UK, the exemption from UK income tax in FA 2004, s. 186 did not apply to the profits of its UK property business. BÄV qualified for an exemption from German corporate income tax. As the UK income tax paid by BTI reduced the amounts distributable to BÄV, BÄV bore the economic burden of the UK income tax.

BTI claimed a repayment of income tax on the income from the investment properties for the tax years 2009–10 and 2010–11. HMRC refused the claim and issued closure notices which were the subject of the appeal.

BTI’s primary argument was that the requirement for BÄV to register with HMRC to obtain the FA 2004, s. 186 income tax exemption was an unjustified restriction on the movement of capital and was unlawful. As a secondary argument, BTI contended that BÄV was not eligible to register with HMRC as it was not a ‘public service pension scheme’.

The FTT dealt with the following issues:

(1)Was BÄV a ‘public service pension scheme’?

(a)What does ‘any enactment’ in FA 2004, s. 150(3)(a) mean?

(b)If ‘any enactment’ does not include an act of the Bayerische Landtag, should FA 2004, s. 150(3)(a) be construed to allow BÄV, as a non-resident pension scheme based in the EU, to register?

(2)If ‘any enactment’ includes an act of the Bayerische Landtag, was BÄV deemed to be a registered pension scheme from 2006 under the transitional provisions in FA 2004, s. 153(9) and Sch. 36?

(3)If BÄV was able to register for the purposes of FA 2004, s. 186, is registration a restriction on the movement of capital contrary to TFEU, art. 63?

(4)If registration is a restriction, is it justified and proportionate?

(5)If the restriction is not justified and proportionate then what is the appropriate remedy?

What does ‘any enactment’ in FA 2004, s. 150(3)(a) mean?

In order to be a public service pension scheme and therefore be eligible to register with HMRC, the appellant would have had to satisfy one of the three conditions in FA 2004, s. 150(3) and the only condition capable of being satisfied was FA 2004, s. 150(3)(a) – a pension scheme ‘established by or under any enactment’.

The appellant argued that ‘any enactment’ in FA 2004, s. 150(3)(a) meant an Act of the UK Parliament whereas HMRC argued that ‘any enactment’ meant any enactment by any body or person authorised to legislate, whether at a national, regional or municipal level anywhere in the world and therefore BÄV was a public service pension scheme.

It was common ground that the meaning of ‘any enactment’ must be determined by reference to its context. As the definitions in FA 2004, s. 150(3)(b) and (c) have a close link to the UK, the FTT concluded that FA 2004, s. 150(3)(a) requires that the enactment must have been made by a UK person or body and commented that this was consistent with the general rule that ‘enactment’ refers to an Act of the UK Parliament. Accordingly, BÄV was not a public service pension scheme and was not eligible to be registered.

Should FA 2004, s. 150(3)(a) be construed to allow BÄV to register?

HMRC accepted that if ‘any enactment’ in FA 2004, s. 150(3)(a) prevented public service pension funds established in other Member States from registering, the legislation would be discriminatory and in breach of EU law on the free movement of capital. The FTT concluded that BTI’s appeal must be allowed on the ground that BÄV was not eligible to register.

Was BÄV deemed to be a registered pension scheme from April 2006?

On the introduction of the FA 2004 pension tax regime in April 2006, ‘relevant statutory schemes’ became registered pension schemes. Relevant statutory schemes were defined as a statutory scheme established before 14 March 1989. A statutory scheme was defined in ICTA 1988, s. 612 as a retirement benefits scheme established by or under any enactment.

The FTT took the view that ‘any enactment’ in ICTA 1988, s. 612 and FA 2004, s. 150(3)(a) meant the same thing and were therefore restricted to an Act of Parliament or similar UK legislation. However, if the FTT were wrong in this conclusion, and any enactment included legislation of the Bayerische Landtag, BÄV was and remained a registered pension scheme by virtue of the deeming provision and BTI’s appeal must be allowed.

Is registration a restriction on the movement of capital contrary to TFEU, art. 63?

It was not necessary for the FTT to conclude on this point as regardless of which meaning of ‘any enactment’ applied, BTI’s appeal was allowed, but it did so in case the decision was appealed.

The FTT considered that the lack of certainty over the tax charges and reporting requirements would tend to dissuade or hinder non-UK pension schemes from investing in the UK and, accordingly, the provisions amounted to a restriction on the free movement of capital. However, this would not amount to a breach of TFEU, art. 63 if the schemes were not objectively comparable or the different treatment is justified by an overriding reason in the general interest.

The FTT was of the view that if BÄV was eligible to register (which the FTT had decided that it wasn’t), it would have been in the same position as and would have been objectively comparable to a UK resident scheme that had chosen not to register.

If registration is a restriction, is it justified and proportionate?

The FTT concluded that if the requirement to register resulted in a restriction of the movement of capital that affects non-resident pension schemes, it is justified and proportionate.

Remedy

Based on the FTT’s conclusions, the question of remedy did not arise.

Disposition

Appeal allowed.

Comment

Although the primary concern of the appellant was that the income tax exemption for pension funds is only available to registered pension funds and was an unjustified restriction on the movement of capital, the FTT chose to focus on the appellant’s secondary argument which was that the scheme was not eligible to register anyway as it did not meet the definition of a public service pension scheme.

HMRC’s stance was perhaps surprising as it argued that registration was available to a much wider group of public service schemes than the FTT concluded it applied to. Also, in terms of interpreting the legislation consistently with EU law, the FTT considered that HMRC’s approach would go too far and cross the boundary between interpretation and amendment.

For commentary on the ‘free movement capital’ principle established under TFEU, art. 63 see In-Depth at ¶103-960, for registration of pension schemes see In-Depth at ¶375-050, and for public service pension schemes see In-Depth at ¶375-300.

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