In the second segment of the 81-100 Group Trust series titled: Barriers to Treaty Access for 81-100 Group Trusts, we explored the challenges that 81-100 Group Trusts encounter with regard to withholding tax relief in certain jurisdictions, providing a broad overview of how the relevant tax authorities perceive and treat 81-100 Group Trusts for tax purposes. In this third and final segment, we will be diving into the distinctive requirements and challenges experienced by 81-100 Group Trusts specifically in France and Switzerland.
As mentioned in our previous article, one of the largest barriers to obtaining treaty relief for 81-100 Group Trusts is the fact that some tax authorities request information and documentation at the level of the underlying pension plans, as opposed to the Group Trust itself. While the rationale behind the request for this level of information may differ across the different jurisdictions, as set-out in the previous article segment, it unquestionably creates practical problems for 81-100 Group Trusts for whom it is often extremely burdensome, time-consuming, and sometimes impractical to source this level of information.
What follows below is an analysis of the treatment of 81-100 Group Trusts in France and Switzerland, respectively, to understand why these two tax authorities in particular pose substantial challenges for 81-100 Group Trusts, specifically with regard to the requirements which must be met in order to obtain treaty relief.
France taxes foreign dividends at 25% (previously 26.5%) and while the treaty does not provide for a full exemption from withholding tax as is often the case when it comes to dividends paid to pension funds, it does offer a reduced rate of 15%, thereby resulting in a claim differential of 10% (for most entities, including tax exempt entities).
U.S. 81-100 Group Trusts should technically be entitled to treaty benefits based on the provisions of the double tax treaty between France and the U.S. However, in practice this is not the case with treaty-based reclaims proving to be problematic and document-intensive. In 2012, the French Tax Authorities (hereinafter “the FTA”) published guidelines on the documentation requirements for 81-100 Group Trusts to benefit from relief-at-source. It is these guidelines that are being strictly enforced by the FTA, even in the case of retrospective reclaims, where Group Trusts seek relief from withholding tax on French source dividends.
“Concerning the case of ‘simple’ collective trusts bringing together pension funds and which automatically transfer dividends from French sources to American pension funds in the year of their receipt, these collective trusts can request, on behalf of their members, the benefit of the simplified procedure.
These trusts must follow the indicated procedure and also communicate:
- the complete list of member entities of these trusts;
- the list of member entities which are funds referred to above with, for each of them:
- the certificate of the American services, or any other supporting document, establishing that they have been created and operate in accordance with the provisions of the sections of the American federal tax code cited above;
- a certificate indicating the share of dividend rights from French sources received by the collective trust accruing to pension funds falling under sections 401 (a), 403 (b) and 457 of the US tax code.
These documents must be produced annually or when the situation has changed since the last request.”
From the above wording and documentation requirements, it is clear that the French Tax Authorities “look-through” the Group Trusts to the underlying participating plans to which, in the view of the FTA, “the dividends from French sources are automatically transferred in the year of their receipt”. On the flip side of the coin, one can also argue that the FTA is requesting this information to ensure that no Puerto Rican plans participate in the Group Trust and that all participating plans are indeed US Pension Funds entitled to treaty benefits. However, when comparing this approach to the wording contained in the double taxation treaty between France and the U.S., this does not align.
In terms of the treaty, a “pension trust and any other organization established in that State and maintained exclusively to administer or provide retirement or employee benefits” is considered a resident for purposes of the treaty. It is worth noting that the U.S. Treasury Department and Internal Revenue Service’s (IRS) policy is to treat 81-100 group trusts as U.S. persons, residents, and the beneficial owners of the income. To this extent the IRS will issue the Form 6166 certificate of tax residence stating:
“I certify that the above-named fund is a Revenue Ruling 81-100 group trust, that it is a resident of the United States of America for purposes of U.S. taxation, that it is exempt from U.S. taxation, and that it consists exclusively of pension, retirement, or similar arrangements that are themselves exempt from U.S. taxation.”
When considering the treaty provisions at face value, an 81-100 Group Trust which is established in the U.S. to exclusively administer retirement or employee benefits, in addition to meeting the requirements set out in the limitation of benefits article, should qualify for treaty benefits in its own right without the need to “look-through” to the participating US plans. Accordingly, it appears as though the French Tax Authorities may be going beyond what is stated in the treaty by requesting information at the level of the underlying pension plans according to the guidelines aimed at obtaining relief at source on French dividends.
Another complexity with submitting withholding tax reclaims to the FTA on behalf of 81-100 Group Trusts is that the FTA will not allow reclaims for the portion of taxes held by an 81-100 Group Trust which invests in another 81-100 Group Trust, irrespective of whether underlying participant information into the second level group trust can also be provided. This creates a substantial problem for 81-100 Group Trusts with more complex investment structures where the assets of Group Trusts are invested into each other (fund-of-fund structure) rather than simply investing directly. WTax does not agree with the FTA’s view and strongly urges claimants who have received rejections in this regard to challenge them in front of the French Tribunal.
On a positive note, the FTA do allow proportionate refunds for the ownership percentage of the participating plans that can meet the relevant information and documentation requirements and do not outright reject the full claim.
In terms of the treaty between the U.S. and Switzerland, a pension or other retirement arrangement will be exempt from dividend withholding tax in Switzerland, thereby allowing for a reclaim opportunity of the full 35%. For other beneficial owners (including taxable beneficial owners), the treaty also provides for a reduced standard rate of withholding of 15%.
In order for a U.S. pension or other retirement arrangement to benefit from the exemption from tax, the two States have to agree that the pension or retirement arrangement generally corresponds to that which is recognised for tax purposes in Switzerland (and provided all other conditions laid down in the treaty are met).
In 2004, the two States entered into a Competent Authority Agreement (2004 CAA) wherein it was clarified that 81-100 Group Trusts are treated as beneficial owners and therefore qualify for the exemption in terms of the treaty, albeit only with respect to participants that are section 401(a), 457(g), or 403(b) trusts.
This agreement further set out the relevant document requirements for 81-100 Group Trusts to claim the exemption, which included a form 6166 issued by the Internal Revenue Service (IRS) and the relevant Swiss claim form 82 E. Despite this clarification, the Swiss Tax Authorities (STA) continued to request additional information, including a form 6166 for each underlying participating plan.
In 2021, the U.S. and Switzerland entered into a new Competent Authority Agreement (2021 CAA) which identified 81-100 Group Trusts as eligible for the exemption, provided that it is “operated exclusively or almost exclusively to earn income for the benefit of pension funds that are themselves entitled to benefits under the Treaty as a resident of the United States.” This 2021 CAA does not, however, specify the documents which must be submitted by an 81-100 Group Trust in order to obtain tax relief under the treaty.
However, despite the conclusion of the 2021 CAA and the clear wording thereof, the STA have continued to request documentation at the level of the underlying participating plans, thereby looking through the Group Trust and rejecting claims for the full exemption where such information has not been furnished. The information being requested by the STA includes a list of the underlying participant plans, as well as a form 6166 for each of these.
What is noteworthy from the wording of the 2021 CAA is that it makes provision for 81-100 Group Trusts which are operated “almost exclusively” for the benefit of U.S. pension funds, to benefit from the exemption. Whilst the 2021 CAA does not specify what is meant by “almost exclusively”, we note that the STA has verbally confirmed that a full refund will be granted if at least 95% of the 81-100 Group Trust qualify pursuant to the 2021 CAA.
This is also consistent with the agreement which was reached between the STA and the Investment Company Institute (ICI) in 2000, wherein it was agreed that US Regulated Investment Companies (RICs) would be entitled to 100% of the treaty relief, provided at least 95% of the RIC shares are held by U.S. residents. However, it is important to note that the agreement with the ICI provides for proportionality in the case where a RIC does not meet the 95% requirement. In this regard, based on the current practice of the STA, it is an “all or nothing” approach when it comes to the exemption from withholding tax, with the STA refusing refunds for proportionality in the case of an 81-100 Group Trust which does not meet the 95% requirement.
Whilst we note that both the 2004 CAA and the 2021 CAA aim to streamline the process of reclaiming in terms of the treaty by clarifying certain issues, it appears as though it has not achieved the goal as the STA continues to request the form 6166 certification at the level of the underlying participants in the 81-100 Group Trust, making the reclaim more burdensome. That being said, the bright side of the Swiss process is that these challenges experienced by 81-100 Group Trusts in Switzerland only come into play when claiming the full exemption from withholding tax on the basis of being classified as a pension arrangement. The STA continues to issue refunds down to 15% under the general dividends clause in the treaty without further requests being made for information and documentation at the level of the underlying participating plans.
Whilst we may not necessarily agree with how both the FTA and the STA treat 81-100 Group Trusts and the fact that information and documentation is being requested at the level of the underlying participating plans in both these territories, the probability of success in these territories nevertheless largely depends on the provision of such information and documentation.
With a statute of limitations period being as short as two years in France, and three years in Switzerland (as recently confirmed by the STA in its practice guidance), it is pertinent to manage deadlines during the reclaim process and to work together with the tax authorities to ensure successful reclaims. As mentioned in our previous article, WTax has developed an investor portal which accommodates document gathering for participating plans in 81-100 Group Trust arrangements, which allows us to ensure seamless and effective reclaims in difficult markets.
We are also committed to closely monitoring developments in these jurisdictions and actively engage with tax authorities and industry bodies to ensure effective collaboration, whilst remaining optimistic about the future of 81-100 Group Trusts and their ability to recover undue withholding taxes in these markets.
As our 81-100 Group Trust article series draws to a close, we encourage our readers to take a proactive approach in their withholding tax affairs and to reach out to us for any assistance in this regard.