On 29 February 2016 the OECD issued a discussion draft on the tax treaty residence of pension funds. Changes are to be made to the OECD Model to ensure that a recognized pension fund is treated for the purpose of the tax treaty as resident in the State in which it is constituted, regardless of whether it enjoys a partial or complete exemption from tax in that State. The discussion draft contains the proposed changes to Articles 3 and 4 of the OECD Model and to the commentary on those articles.

The proposed changes add a definition of a recognized pension fund to paragraph 1 of Article 3. This refers to an entity or arrangement established in a State that is treated as a separate person under the laws of that State and is constituted to provide retirement or similar benefits to individuals and is regulated by the state or a political subdivision; and is constituted and operated exclusively to invest funds for the benefit of the entity or arrangement.

The commentary is amended to explain that the term “entity or arrangement” is inserted to cover situations where pension benefits are provided by a trust or similar vehicle which does not constitute an entity under the relevant law. The entity or arrangement must however be treated as a separate person under the taxation law of the State, otherwise the income would be treated as income of another person for tax purposes and the residence of the trust itself would not be relevant.

Paragraph 1 of Article 4 of the OECD Model will be amended to include a recognized pension fund within the definition of a resident of a contracting state.

Interested parties are invited to send in comments on the discussion draft to the OECD by 1 April 2016.