German pension fund wins tax case following EU discrimination ruling
The UK First-tier Tribunal (the first level Court in which tax cases are heard in the UK) has decided that Bayerische Ärtzeversorgung (BÄV) was entitled to a refund of UK income tax paid on its UK property investments.
The appeal was made by the entity that physically received the income in question, BAV-TMW-Globaler-Immobilien Spezialfonds (BTI), a real estate investment fund. However, because that entity is tax transparent, it was in fact BAV that was entitled to the income from its property investments.
BAV was originally set up by the Bavarian Parliament as a pension scheme for doctors, dentists and vets.
In HMRC’s view, under UK tax legislation, BAV’s UK investment income was liable to UK income tax. This was not the case for equivalent schemes in the UK or other overseas schemes that may be able to be ‘registered’ under UK tax legislation. BAV could not be registered under UK pension scheme legislation, which meant that it could not claim exemption from UK income tax.
On hearing the facts of the case and detailed technical arguments, the First-tier Tribunal found that BAV could not have registered as a pension scheme in the UK in order to benefit from the exemption. It found that this was discriminatory under EU law on free movement of capital, with which UK domestic law must comply.
This decision may be of interest to other non-resident funds that cannot register under UK law and suffer a loss of tax as a consequence.
The question of the potential impact of Brexit on this and similar decisions is an interesting one. While at the time of leaving the EU, all EU law will for a time be converted into UK law, in the longer term the UK will no longer have to adhere to EU legislation. However, as this case concerns discrimination that occurred before Brexit, it will remain in force, albeit First-tier Tribunal decisions are not binding on higher UK courts.
Please contact us if you would like advice on any UK-Germany cross-border tax issues.