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Taxation of foreign military pension - in this question a UK pension

Question:
 

I was told by the UK tax office that my military pension (UK government/crown) must be paid and taxed in the UK and they have an agreement with the Netherlands that it would be exempt from taxation here. But i have been told by PWC it must be declared and taxed here as well, which is a lot at 20% in UK and 52% here in NL. Can you advise?

 
Answer:
 
A pension is normally taxed in the country where the person who receives the income is living. Most of the tax treaties contain however an exemption for pensions which are related to work - as a civil servant - for the government, a public function. This includes working for the military. These government pensions are normally taxed in the country for which the work was done. 
 
Recently the tax treaty between the Netherlands and the UK was renewed (see attachment). In this new tax treaty there is no difference anymore between a normal pension and a pension related to a public function. All pensions are treated the same way. This means that your UK military pension is taxed in the Netherlands since you are a resident here. A tax at source in the UK is possible under certain conditions but in my opinion this is not the case in your situation. 
 
The tax treaty between the Netherlands and the UK determines in article 17 how pensions are taxed and in article 18 how (and which) income from a public function is taxed. As you will see article 18 no longer mentions pensions separately (which was the case in the previous tax treaty) which means that public pensions now also fall under article 17 and therefore under the "standard" rules. 
 
ARTICLE 17 
 
Pensions  
 
(1) Pensions and other similar remuneration (including pensions provided under a social security system and annuities) paid to a resident of a Contracting State shall be taxable only in that State.  
 
(2) Notwithstanding the provisions of paragraph (1) of this Article, payments falling within that paragraph may also be taxed in the Contracting State from which they are derived, in accordance with the laws of that State, where:  
(a) the right to claim the payments has been exempted from tax in that State, or contributions associated with the payments have been taken into account for the purposes of tax relief in that State; and  
(b) the payments are not taxed in the Contracting State of which the recipient is a resident or in a third state, at the generally applicable rate for income derived from employment, or less than 90 per cent of the gross amount of the payments are taxed.  
The preceding provisions of this paragraph shall apply only if the total gross payments which, pursuant to the preceding provisions, would be taxable in the Contracting State in which they arise, exceed an amount of 25,000 euros during the fiscal year concerned.  
 
(3) Notwithstanding the provisions of paragraphs (1) and (2) of this Article, if a lump-sum payment is paid before the date on which the pension commences, it may be taxed in the Contracting State from which it is derived. However, if the lump sum is paid on or around the commencement of a periodic pension, it shall be taxable only in that State.  
 
(4) For the purposes of paragraph (2) of this Article, payments shall be deemed to be derived from a Contracting State to the extent that the right to claim the payments has been exempted from tax in that State or the contributions associated with them have been taken into account for the 
purposes of tax relief in that State. The transfer of a pension from a pension scheme in a Contracting State to a pension scheme in another state shall not restrict the taxing rights of the first-mentioned State under this Article.  
 
(5) The competent authorities of the Contracting  States may by mutual agreement settle the mode of application of paragraph (2) of this Article.  
 
(6) Contributions made by or on behalf of an  individual who exercises employment or selfemployment in a Contracting State ("the host state”) to a pension scheme that is recognised for tax purposes in the other Contracting State ("the home state”) shall, for the purposes of:  

(a) determining the individual’s tax payable in the host state; and  
(b) determining the profits of his employer which may be taxed in the host state;  

be treated in that State in the same way and subject to the same conditions and limitations as contributions made to a pension scheme that is recognised for tax purposes in the host state, to the extent that they are not so treated by the home state.  

(7) Paragraph (6) applies only if the following conditions are met:

(a) the individual was not a resident of the host state, and was participating in the pension scheme (or in another similar pension scheme for which the first-mentioned pension scheme was substituted), immediately before he began to exercise employment or selfemployment in the host state; and  
(b) the pension scheme is accepted by the competent authority of the host state as generally corresponding to a pension scheme recognised as such for tax purposes by that State.

(8) For the purposes of paragraphs (6) and (7):

(a) the term "pension scheme” means an arrangement in which the individual participates in order to secure retirement benefits, including benefits for widow and orphan support, payable in respect of the employment or self-employment referred to in paragraph (6);
(b) a pension scheme is recognised for tax purposes in a Contracting State if the contributions to the scheme would qualify for tax relief in that State and if payments made to the scheme by the individual’s employer are not deemed in that State to be taxable income of the individual.  

ARTICLE 18

Government Service  

(1) (a) Salaries, wages and other similar remuneration paid by a Contracting State or a political subdivision or a local authority thereof to an individual in respect of services rendered to that State or subdivision or authority shall be taxable only in that State.  

(b) However, such salaries, wages and other similar remuneration shall be taxable only in the other Contracting State if the services are rendered in that State and the individual is a resident of that State who:

(i) is a national of that State; or  

(ii) did not become a resident of that State solely for the purpose of rendering the services.  

(2) The provisions of Articles 14, 15 and 16 of this Convention shall apply to salaries, wages and other similar remuneration in respect of services rendered in connection with a business carried on by a Contracting State or a political subdivision or a local authority thereof.


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