If you are an expat employee in Ireland or an Irish national who has relocated abroad for work or retirement, you may not want to keep your pension in Ireland. Here's why.
In December 2017, Irish Revenue issued two new chapters to their Pensions Manual, which on the face of it did not look draconian, but upon further investigation, the new chapters should leave expats with Irish pension pots asking some key questions.
Typically, when you 'vest' a pension at retirement, you can receive a portion of the fund as cash, and then an income/pension paid for life from the rest.
If a pensioner has emigrated to another country to retire, and that country has a suitable double tax treaty or agreement (DTA) with Ireland, the pensioner can claim treaty relief and have a gross payment at source. He or she will then pay tax in their current country of residence.
All this though seems to have changed with regard to Ireland, unless you are in receipt of benefits direct from a Defined Benefit Occupational Pension. If you have a '"defined contribution/money purchase" plan, things have changed quite dramatically.
Let's look at the detail.
Chapter 23, Approved Retirement Funds
"23.8 Provided the individual has satisfied the specified income or AM RF/annuity requirements (see paragraphs 23.5 and 23.8), the balance of the retirement fund, after any amount taken as a retirement lump sum, may be paid to the individual. This amount is treated as emoluments of the individual and is taxable under Schedule E. The person making the payment (Life Office or Scheme administrator) is deemed to be an employer for all obligations under the TCA 1997.
"23.16. Distributions (including deemed distributions) from ARFs and AMRFs are generally treated and taxed as emoluments under Schedule E, regardless of the residence status of the individual A distribution from ARFs or AMRFs are not payments of pension, PAYE Exclusion Orders are not issued in respect of such distributions."
For the sake of completeness, Revenue also confirms that PAYE Exclusion Orders are not issued where an individual takes the balance of his or her pension fund as a taxable lump sum (see paragraph 23.8).
What is an emolument?
I underline the use of the word 'emolument' in the above chapter for good reason. So, what is an emolument? A search engine defines it as a "profit, salary, or fees from office or employment; compensation for services." Make no mistake that what Irish Revenue is referring to here, is your Irish pension fund balance.
The big question is, why is it being called an emolument? And what are the implications?
Interaction with double taxation agreements
With regard to how distributions to non-resident taxpayers are treated under Ireland's DTAs, other than those DTAs which specifically provide for the taxation of distributions from Approved Retirement Funds (ARFs), while a distribution of income or gains arising from the underlying investments, or of the original capital, is the taxable event in Ireland under domestic legislation, it is not seen as taxable for DTA purposes.
As the ARF owner is the beneficial owner of the ARF capital, and any income and gains arising, he or she should be treated as such for the purposes of applying the various articles of the DTA between Ireland and their country of residence.
So, in order to determine where the taxing rights lie for a distribution from an ARF, the distribution should be broken down between:
- the underlying income
- gains or capital which it represents.
The appropriate articles in the DTA should then be applied accordingly at the dates on which the income or gains arose to the ARF. If the individual was a resident of Ireland at those dates, the DTA would not apply. 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.
Chapter 24 Personal Retirement Savings Account (PRSA)
"24.4 An individual who retains the balance of a PRSA (after payment of the tax free retirement lump sum) in the PRSA, rather than use it to purchase an annuity or transfer it into an Approved Retirement Fund (ARF) or AMRF, may then draw down from that balance as and when he/she chooses. Subject to certain exceptions (see below), amounts drawn down from a vested PRSA are treated as emoluments and are subject to tax under Schedule E at the individual's marginal rate. Imputed withdrawals under section 790D (see paragraph 24.9 and Chapter 28) are subject to tax in the same manner as actual withdrawals.
"24.10 Income and assets retained in a vested PRSA are beneficially owned by the PRSA owner. Withdrawals (including deemed withdrawals) from vested PRSAs are treated and taxed as emoluments under Schedule E regardless of the residence status of the individual.
"As with payments from an ARF or an AMRF (see Chapter 23}, withdrawals from vested PRSAs are not payments of pension and Revenue do not issue PAYE exclusion orders. PRSA owners in respect of such withdrawals where the PRSA owner is non-resident in the State."
The treatment of ARF distributions (see Chapter 23.16) has also applied since 22 December 2017 in respect of withdrawals from vested PRSAs.
These two new chapters raise some key questions – and concerns – about how future Irish pension payments to non-resident retirees will be handled under DTAs. Classing them as 'emoluments' appears a quite deliberate move.
If you are an expat employee in Ireland or an Irish national looking to retire abroad, you may not want to 'vest' your pension in Ireland but instead look at alternative solutions, because, leaving your pension behind could be damaging to your wealth.
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