State pension: a tax treaty question

[allanb]

This isn't really a question about France, but I hope someone here may know the answer from experience with tax treaties generally.    

I am resident in France but I have a state retirement pension from Luxembourg, which under the France-Luxembourg treaty is taxable only in Luxembourg. So as far as France is concerned it's revenu exonéré.  No problem there.

However, I would like to know where it would be taxable if I become resident in the UK in the future, which is a possibility. 

The relevant part of the UK-Luxembourg treaty (found on the HMRC website) says:

(1) Subject to the provisions of paragraphs (1) and (2) of Article 19 pensions and other similar remuneration paid to a resident of a Contracting State in consideration of past employment shall be taxable only in that State.

[Article 19 refers to pensions from Government service, which mine is not.]  


(2) Notwithstanding the provisions of paragraph (1) of this Article, pensions paid under the social security legislation of a Contracting State may be taxed in that State.

 

[I think this would include my state retirement pension.]

I am puzzled by the word "may" here.  Does it mean that Luxembourg can tax the pension if it feels like it?  If it does, will the UK refrain from taxing it?  

I think a similar question has come up before on this forum but I can't find it - and in any case what applies in one country will not necessarily apply in others.

Can anyone help?

[parsnips]

Hi,

 As I read the treaty it is art 18 that applies and the situation is the same as for UK state pension in France ie; it is taxable in the country of residence, and should be paid gross in the state of origin. Why not contact HMRC to confirm.

[allanb]

Thanks for the reply.  But here's the problem:

Article 18 in the UK/France treaty says that this kind of pension is taxable in the country of residence.

The corresponding article in the France/Luxembourg treaty (which currently applies to the pension I'm talking about) says that it is taxable in the country that pays it.

Neither of them, as far as I can see, says that it "shall" be taxed in one country but at the same time it "may" be taxed in the other - which is what the UK/Luxembourg treaty seems to say.

I have already searched the HMRC website and have also tried several times to phone them, without success.  Do you know whether they have a usable e-mail address?

[AnOther]

I think the word 'may' is just a convenient get out to justify HMRC doing whatever they feel like.

If there are procedures for your Luxembourg pension to be paid gross then it's possible HMRC 'may' decide to tax you and leave it to you to organise having it paid net from Luxembourg, a bit like what happens with non government UK pensions paid in France.

I don't know the tax regime in Luxembourg, almost certainly less onerous than in UK or France though I'd think, but if not it might be that it would be to your advantage to be taxed in UK. You need the numbers and your calculator !

 

[Araucaria]

If Luxembourg tax law says that people in receipt of Luxembourg state retirement pensions have to pay Luxembourg tax even if they are not resident in Luxembourg, then Article 18 would operate to make a Luxembourg pension taxable in both the UK and Luxembourg. Allanb would have to pay the Luxembourg tax, and then claim a credit for the tax he had paid when making his UK tax return. The effect of this is usually that you end up paying the higher of the two countries' taxes (because if Luxembourg tax is more than the corresponding UK tax, you can't get any extra UK tax credit for it - you can only reduce the UK tax on the pension to zero).

If Luxembourg doesn't tax non-resident pensioners, then it's as Parsnips says.

But HMRC won't be able to answer the question, as it's a matter of finding out what Luxembourg does under its own laws. UK HMRC people aren't likely to know - you'd need to ask in Luxembourg instead.

[Araucaria]

Those two paragraphs of Article 18 work like this for someone who is resident in the UK:

Paragraph 1 says that all pensions (and all similar income in respect of past employment) will be taxed in the country of residence, ie the UK. The word "only" appears but it is going to be modified by paragraph 2. Everything except state retirement pensions will in fact only be taxable in the UK. Luxembourg would have no discretion: it would be UK tax only that would be payable.

Then paragraph 2 says the rules can be different for state retirement pensiions. These may also be taxed in Luxembourg (the word "also" isn't actually used, but this is standard tax treaty language). This paragraph is permissive. It lets Luxembourg tax these pensions if it wants to, and of course if it has tax laws that impose the tax. If it does want to, the Luxembourg tax is then set off against the UK tax due (there's another article that deals with that - Article 23). Without paragraph 2, a Luxembourg tax law imposing tax on non-residents' pensions would be overridden by the tax treaty.

There's no question of anyone at HMRC having any discretion - the UK would tax these pensions for sure. The only question is whether Luxembourg does too, and whether you'd have to claim a tax credit as a result.

[allanb]

[quote user="Araucaria"]There's no question of anyone at HMRC having any discretion - the UK would tax these pensions for sure. The only question is whether Luxembourg does too, and whether you'd have to claim a tax credit as a result.[/quote]Thank you very much - that clarifies it.

[lacote0_0]

It may be helpful to look at what the French text of the Convention says. However, I haven't been able to find it online.

[parsnips]

Hi,

      I found the following on one of the many sites found by googling "switzerland taxation of swiss state pension", you will probably understand the terms used better than me.

      AVS/AI pensions are taxable in the country of residence.

      2nd Pillar pensions accrued under public law ,are taxable only in switzerland.

      2nd Pillar pensions accrued under private law are not taxable at source in switzerland, only in the country of residence.

      Lump sums taken from pension funds is taxable in switzerland.

  

      If you google as above I am sure you will eventually find the exact answer to your question.

[Sunday Driver]

I thought this thread was about taxation of a Luxembourg pension in the UK.....

 

 

[allanb]

[quote user="Sunday Driver"]I thought this thread was about taxation of a Luxembourg pension in the UK.....[/quote]Don't worry, it still is.

Araucaria's explanation makes sense to me.  The phrase that originally puzzled me (pensions paid under the social security legislation of a Contracting State "may" be taxed in that State) doesn't mean that Luxembourg will tax it only if it feels that way inclined.  I now understand that it means it will be taxable in Luxembourg, if Luxembourg national law says so.  I think Parsnips is merely pointing out that a Google search could probably tell me whether this is the case. 

I don't think there's any connection with Switzerland, unless I've missed the point.

In the end it will make no difference to me, if the tax paid in Luxembourg can be offset against the tax payable in the UK (assuming it doesn't exceed it). 

Thanks to all who have taken an interest in this question.

[parsnips]

[quote user="Sunday Driver"]

I thought this thread was about taxation of a Luxembourg pension in the UK.....

 

 

[/quote]

Apologies, somewhere along the line I got my tax havens crossed!