On 14 September 2012 the UK Government and U.S. Treasury Department signed a 'Bilateral Agreement to improve international tax compliance and to implement FATCA'.  The Bilateral Agreement specifies the retirement plans and financial accounts that will be treated as exempt beneficial owners or exempt products for the purposes of FATCA.  The Bilateral Agreement is good news for pension schemes and pension providers as the scope of the exemptions is very wide.

Nicola Rondel, Senior Associate in Hogan Lovells' pensions team, said:

"UK retirement plans and pension providers should welcome the Bilateral Agreement because its effect will be to take the majority of pension schemes outside the scope of FATCA."


The Foreign Account Tax Compliance Act of 2009 (FATCA) was enacted by the U.S. to prevent offshore tax evasion by ‘U.S. persons’.  FATCA requires non-U.S. financial institutions (FFIs) to register with the U.S. Internal Revenue Service (IRS), perform due diligence to identify U.S. accounts and report client data to the IRS.  Any FFIs that do not comply face a 30% withholding tax on U.S. sourced income or payments.  The reporting requirements are onerous and will be costly.  However, FFIs must either comply with FATCA or, if they are not willing to do so, be subject to the withholding tax or exit the U.S. capital markets.

Draft regulations issued in March 2012 introduced two exemptions - the ‘certified deemed-compliant’ and ‘exempt beneficial owner’ exemptions - which were intended to cover FFIs viewed as being low-risk, such as non-U.S retirement schemes.  Unfortunately, it was not clear that UK retirement plans would fall within either of the exemptions.

Model Intergovernmental Agreement

On 26 July 2012 HM Treasury issued a joint statement with the governments of the U.S., France, Germany, Italy and Spain announcing the publication of the Model Intergovernmental Agreement.  The statement noted that the UK Government's aim was to ensure that the burdens imposed on financial institutions were proportionate to the goal of combating tax evasion and that there would be a wider scope of institutions and products effectively exempt from the FATCA requirements under the Agreement.

The Agreement made it clear that the United States would carve out certain retirement plans and financial products from the scope of FATCA but it did not provide any details of the plans and products to be covered.  This was left to the Bilateral Agreement.

Bilateral Agreement – Annex II

Annex II to the Bilateral Agreement specifies the retirement plans that will be treated as 'exempt beneficial owners' under FATCA.  It also lists accounts and products which will be classed as 'exempt products' and will, therefore, fall outside the FATCA reporting requirements under the Bilateral Agreement. 

'Deemed exempt beneficial owners'

The Annex falls back on the U.S.-U.K. Double Taxation Treaty to describe the retirement funds which will be 'deemed exempt benefical owners'.  Any pension scheme or other retirement arrangement established in the UK and described in Article 3 of the Treaty will be deemed exempt. 

The term 'pension scheme' under Article 3 of the Treaty is widely drafted and covers 'any plan, scheme, fund, trust or other arrangement established in the U.K. (or the U.S.) which is generally exempt from income taxation [i.e. a registered pension scheme] and is operated principally to administer or provide pension or retirement benefits or to earn income for the benefit of such arrangements'.  The definition of 'pension scheme' was extended in 2005 to include trust-based pension plan investment pooling arrangements and (subject to certain conditions being met) UK resident unit trusts in which a UK pension plan participates and funds, plans, or arrangements to which a UK pension plan contributes by paying premiums to an insurance company.   A 'pension scheme' must satisfy the limitation on benefits provisions in Article 23 of the Treaty which provide that more than half of its beneficiaries, members or participants are residents of the UK. 

Exempt products

Annex II also lists certain retirement accounts or products established and maintained by a U.K. Financial Institution which will be exempt from the financial account reporting requirements under the Bilateral Agreement.  Again, the exemptions are widely drafted and should cover the majority of UK contract-based pension plans.  The specified accounts include registered pension schemes and pension arrangements where annual contributions are limited to the annual allowance and funds can only be taken from age 55 other than on serious ill-health grounds.  It also extends to non-investment-linked, non-transferable immediate life annuities issued to an individual and which pay a pension or disability benefit provided under such a pension scheme or arrangement. 

Next steps

HMRC issued a consultation document "Implementing the UK-U.S. FATCA Agreement" on 18 September 2012. The closing date for comments is 23 November 2012.  Final legislation will be put forward as part of the Finance Bill 2013.  The Government has said that it will also continue to seek views on the practical aspects of implementing the Bilateral Agreement, such as the reporting and systems requirements, which have not yet been finalised with the U.S.