General notions:
In general, pension1 arrangements are classified in three categories:
1. Basic state pensions
2. Employment related (or occupational pensions)2
(i) Contributions -> by employee and/or employer
(ii) Earning in fund (yield) or accrual of rights
(iii) Payments -> periodical payments or lump sum
3. Personal private savings or annuity schemes3
In theory, there are three events in the pension-earning process that states may consider taxable:
(1) on making the pension contributions, which, in the case of employment-related schemes, may
include contributions made by theemployees as well as theemployers;
(2) the accrual of investment returns by the pension funds; and
(3) on making the pension payments themselves
EET entails an:
1. exemption of the contribution to the pension fund,
2. exemption of the yield of the fund,
3. taxation of the pension at the moment of the payment
ETT entails an:
1. taxation of the contribution (no deferral is allowed),
2. exemption of the yield of the fund,
3. exemption of the pension at the moment of the payment.
STEP 1: applicability of Article 18 OECD
First, assess which DTC applies in the given case (ie Arts. 1+2)
In order for Article 18 to apply, the following conditions must be met:
1) There is income (ie occupational pensions)
2) There is a ‘cross-border situation’
3) There is a ‘resident of a contracting state’ (Art. 4)
4) No lex specialis applies (ie Art. 19(2))
- Article 18 does NOT apply to pensions in respect to government services = 19(2) -> taxed in the
paying state
o Exception: where the resident and national of the other state -> state of residence
taxation
5) Article 18 applies
STEP 2: objective scope -> ‘pensions and other similar remuneration (…) in consideration of past
employment’
Terms NOT defined in the MC. Art. 3(2) to provide definition.
1
A pension is an arrangement designed to provide financial security to individuals in the event of their retirement.
2
Privately funded employment related (contributions by both the employee and employer)
3
Annuities, life insurance, savings on bank accounts
In general, pension1 arrangements are classified in three categories:
1. Basic state pensions
2. Employment related (or occupational pensions)2
(i) Contributions -> by employee and/or employer
(ii) Earning in fund (yield) or accrual of rights
(iii) Payments -> periodical payments or lump sum
3. Personal private savings or annuity schemes3
In theory, there are three events in the pension-earning process that states may consider taxable:
(1) on making the pension contributions, which, in the case of employment-related schemes, may
include contributions made by theemployees as well as theemployers;
(2) the accrual of investment returns by the pension funds; and
(3) on making the pension payments themselves
EET entails an:
1. exemption of the contribution to the pension fund,
2. exemption of the yield of the fund,
3. taxation of the pension at the moment of the payment
ETT entails an:
1. taxation of the contribution (no deferral is allowed),
2. exemption of the yield of the fund,
3. exemption of the pension at the moment of the payment.
STEP 1: applicability of Article 18 OECD
First, assess which DTC applies in the given case (ie Arts. 1+2)
In order for Article 18 to apply, the following conditions must be met:
1) There is income (ie occupational pensions)
2) There is a ‘cross-border situation’
3) There is a ‘resident of a contracting state’ (Art. 4)
4) No lex specialis applies (ie Art. 19(2))
- Article 18 does NOT apply to pensions in respect to government services = 19(2) -> taxed in the
paying state
o Exception: where the resident and national of the other state -> state of residence
taxation
5) Article 18 applies
STEP 2: objective scope -> ‘pensions and other similar remuneration (…) in consideration of past
employment’
Terms NOT defined in the MC. Art. 3(2) to provide definition.
1
A pension is an arrangement designed to provide financial security to individuals in the event of their retirement.
2
Privately funded employment related (contributions by both the employee and employer)
3
Annuities, life insurance, savings on bank accounts
