Trevor John Masters v The Commissioners for HMRC

This appeal concerns the proper interpretation and application of the UK-Portugal Double Tax Convention (the ‘DTC’). More specifically, whether withdrawals from the Appellant’s Self-Invested Personal Pension (‘the TJM SIPP’), paid to him whilst he was resident in Portugal and non-resident in the UK, are taxable in the UK or Portugal.

The Appellant (“Mr Masters”) appeals:

We were provided with the following documents:

Mr Masters was available to give oral evidence at the hearing. However, HMRC did not challenge Mr Masters’ evidence so he was not called upon to give oral evidence and the Tribunal adopted his witness statement as his evidence in chief.

Both parties’ experts gave oral evidence at the hearing via video link from Portugal and were cross examined and answered questions from the panel. The expert witnesses gave evidence on Portuguese law and practice which is a matter of fact for the purpose of UK Tribunal proceedings. To the extent that the experts’ evidence addressed the interpretation of the DTC, we have treated this evidence as equivalent to academic commentary.

There are no procedural disputes between the parties so we will not address the procedural background to this appeal.

From all of the above we make the following findings of fact.

Mr Masters became an employee of an entity in the corporate group now headed by Tesco PLC (“Tesco”) on 2 July 1979, and joined the Tesco PLC Pension Scheme (the “Tesco Pension Scheme”) on 7 March 1983. Tesco made payments into the Tesco Pension Scheme in respect of Mr Masters’ employment with Tesco.

Mr Masters built up his entitlement under the Tesco Pension Scheme in respect of a period of pensionable service between 7 March 1983 and 21 November 2015, when the scheme closed for future benefit accrual. Mr Masters’ entitlement under the Tesco Pension Scheme was exclusively funded by: (i) contributions from his employer as part of Mr Masters’ remuneration for his employment; and (ii) Mr Masters’ own employee contributions and salary sacrifice in the amount of £697,680.24. Mr Masters’ employment with Tesco ended in or around June 2017.

At all relevant times:

Mr Masters had been a member of the Tesco Pension Scheme by virtue of his employments, such that all the benefits that he had accrued and that would, ultimately be paid to him by the Tesco Pension Scheme, would be paid in consideration of that past employment.

In April 2016, the TPTL transferred the cash equivalent of Mr Masters’ defined benefit pension entitlement under the Tesco Pension Scheme to the TJM SIPP, which is a type of UK registered pension scheme. At the time of the transfer Mr Masters was not yet 55 years old and the TPTL could therefore only transfer Mr Masters’ accrued pension benefits to certain other pension schemes and, in the case of UK pension schemes, only to a registered UK pension scheme. A transfer direct to Mr Masters or to a non-registered UK pension scheme at that time would have been an unauthorised payment, subject to charge under Part 5 of the Finance Act 2004.

The transfer of Mr Masters’ pension entitlement under the Tesco Pension Scheme was effected by (i) an application form for a James Hay Modular iSIPP, signed by Mr Masters and dated 12 April 2016; and (ii) a declaration to proceed with the transfer of benefits from the Tesco Pension Scheme signed by Mr Masters and his adviser Jackie Holmes, also dated 12 April 2016.

On 21 April 2016, TPTL made a BACS payment of £5,968,074.00 directly to the bank account of James Hay Pension Trustees Ltd, which was confirmed by letter dated 26 April 2016. This payment was the cash equivalent of Mr Masters’ defined benefit pension entitlement under the Tesco Pension Scheme (the “Tesco Transfer Amount”), which included employee contributions/salary sacrificed of £607,680.24.

By 9 May 2016 the Tesco Transfer Amount had been banked into what was described by James Hay Administration Company Limited as Mr Masters’ “SIPP bank account” where it was held pending receipt of any investment instructions from Mr Masters.

The SIPP was split into two sub-accounts containing the following amounts:

The TJM SIPP is and was a Modular iSIPP. The underlying legal structure of the Modular iSIPP is The James Hay Personal Pension Plan, the relevant facts of which are as follows:

Following the transfer of the Tesco Transfer Amount from the Tesco Pension Scheme to the TJM SIPP, Mr Masters made no further contributions to the TJM SIPP.

The Tesco Transfer Amount, once in the TJM SIPP – with the exception of some cash made available for administration fees - was invested in managed portfolios operated by investment managers on James Hay’s panel.

It was Mr Masters’ choice as to which managed portfolios the funds were invested in, out of the options made available to him by James Hay.

As a result of the above, the value of the TJM SIPP has always been equal to the Tesco Transfer Amount adjusted for any investment gains and/or losses from time to time, less any withdrawals made by Mr Masters from the TJM SIPP.

Mr Masters was tax-resident in the UK during all UK tax years up to and including the tax year ended 5 April 2019. Mr Masters left the UK to live in Portugal on 18 March 2019. Mr Masters was not tax-resident in the UK for the tax-year ended 5 April 2020. Mr Masters was tax-resident in Portugal and was classed as a Non-Habitual Resident (“NHR”) in Portugal in the calendar years 2019 and 2020.

Residents who acquired NHR status in Portugal at that time could benefit from the NHR scheme for a 10-year period. The NHR scheme allowed for tax exemptions on certain types of foreign sourced income, provided certain conditions were met.

The NHR scheme provided that foreign source pension income paid to NHRs, is exempt from taxation in Portugal if either (i) it is taxed at source under a Double Tax Treaty ("DTT") with the source state or (ii) it is not considered to be obtained in Portugal under the Portuguese Income Tax (PIT) Code territoriality rules.

Foreign pension income is therefore exempt for NHRs if it is either taxed by the Source State pursuant to the terms of the applicable DTT or if it is not deemed to be obtained in Portugal.

For new Portuguese residents acquiring NHR status from 1^st April 2020 full exemption no longer applies and instead a 10% flat rate of tax applies on all foreign pension income of NHRs.

Mr Masters withdrew the following amounts from the TJM SIPP during the tax year ended 5 April 2020, when he was not tax-resident in the UK and was tax resident in Portugal with NHR status.

The above withdrawals (“the SIPP Withdrawals”) were subject to deduction of UK income tax at source in the amount of £1,562,169.10. This is the amount of UK tax in dispute in these appeals.

Mr Masters included the SIPP Withdrawals on his Portuguese tax return. The Portuguese tax authorities did not tax the SIPP Withdrawals on the basis that they are classified in Portugal as category H income (pensions, including annuities and alimony payments) and Mr Masters was taxed in Portugal under the NHR Scheme for the 2019 and 2020 calendar years. As a result of his NHR status at that time, the TJM SIPP payments were exempt from PIT but would have been taken into account in determining the applicable tax rate for any other income that Mr Masters may have had which was liable to PIT.

On 11 September 2019, HMRC issued a coding notice to Mr Masters with a tax code of 1250L. This coding notice required “JAMES HAY PENSION TRUSTEES LTD SIPPS” to deduct UK income tax from any withdrawals from the TJM SIPP made by Mr Masters.

On 30 September 2019, The Bubb Sherwin Partnership Limited submitted a DT-Individual form to HMRC (the “DT-Individual Form”) on behalf of Mr Masters.

The DT-Individual Form included a request for an NT tax code. Such a code would permit James Hay to pay any sums withdrawn by Mr Masters from the TJM SIPP without deducting UK tax at source.

The DT-Individual form also requested a refund of UK tax that had been withheld, however, the form only provided details of tax withheld from a separate income source that is not the subject-matter of this Appeal.

By letter dated 6 December 2019 HMRC rejected Mr Masters’ request for an NT Code on the basis that:

Mr Masters’ UK self-assessment tax return for the tax year ended 5 April 2020 was submitted electronically on 8 July 2020, together with an HS304 Claim form, whereby Mr Masters claimed relief for tax of £1,564,989 deducted on the SIPP Withdrawals of £3,527,150. Mr Masters now accepts that the correct figure for the SIPP Withdrawals was £3,521,150.35 with £1,562,169.10 tax having been deducted.

By letter, dated 28 September 2020, an officer of HMRC gave notice to Mr Masters of their intention to enquire under Schedule 1A of the Taxes Management Act 1970 (“TMA 1970”) into Mr Masters’claim for an NT code made in the DT-Individual form for the tax year ended 5 April 2020, dated 30 September 2019 (the “Schedule 1A Enquiry”).

By letter, dated 12 February 2021, an officer of HMRC gave notice to Mr Masters of their intention to enquire under section 9A TMA 1970 into Mr Masters’ personal tax return for the tax year ended 5 April 2020 (the “Section 9A Enquiry”).

The enquiries were completed by separate closure notices, dated 25 May 2021:

There were some procedural issues after the closure notices were issued which have now been resolved between the parties so we set out below the agreed position and the basis on which we are proceeding with this appeal.

On 12 May 2022 KPMG, on Mr Masters’ behalf, appealed against the closure notices and HMRC accepted the late appeals.

On 7 September 2022 KPMG, on Mr Masters’ behalf, requested an independent review of the closure notices.

By letter, dated 4 October 2022, HMRC confirmed their view of the matter.

HMRC issued their review conclusion letters (the “Review Conclusion Letters”) on 18 November 2022 and found:

On 15 December 2022 KPMG, on Mr Masters’ behalf, notified Mr Masters’ appeals to the Tribunal against the Review Conclusion Letters dated 18 November 2022.

On 4 February 2023 the Tribunal consolidated Mr Masters’ appeals.

On 5 April 2023 HMRC provided a consolidated Statement of Case.

On 18 August 2023 KPMG, on Mr Masters’ behalf, applied to amend the Consolidated Grounds of Appeal.

The Tribunal allowed Mr Masters’ application on 13 September 2023. On 8 November 2023 HMRC provided an amended consolidated Statement of Case.

For our purposes and the purposes of this appeal, this is an appeal against HMRC’s Review Conclusion Letters issued on 18 November 2022 in which HMRC upheld its position set out in the closure notices issued on 25 May 2021 that;

The DTC was given effect in UK law by The Double Taxation Relief (Taxes on Income) (Portugal) Order 1969 (SI 1969/599) and the Taxation (International and Other Provisions) Act 2010 ss.2 and 6. All references to articles in this decision are to articles of the DTC unless otherwise stated.

Article 3(3) of the DTC provides as follows:

Article 4(1) of the DTC provides as follows:

Article 17 of the DTC (based on OECD model Article 18) provides as follows:

Article 20 of the DTC (based on OECD model Article 21) provides as follows:

The relevant principles for the proper interpretation of double tax treaties were recently summarised by the Supreme Court in Royal Bank of Canada v HMRC[2025] UKSC 2 (“RBC”), which concerned the application of Article 6(2) of the UK/Canada Double Tax Convention 1978. In particular, at [27]-[32], Lady Rose (with whom Lord Lloyd-Jones, Lord Hamblen and Lord Leggatt agreed) held as follows:

“27.

The UK/Canada Convention is to be interpreted in accordance with the 1969 Vienna Convention on the Law of Treaties (“the Vienna Convention”).

28.

Article 31 of the Vienna Convention provides that a treaty “shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the lights of its object and purpose”. Article 32 describes the supplementary means of interpretation including the travaux préparatoires when the meaning is ambiguous or obscure. Lord Reed summarised the effect of Articles 31 and 32 in Anson v Revenue and Customs [2015] STC 1777, [2015] 4 All ER 288 as follows at para 56:

“Put shortly, the aim of interpretation of a treaty is therefore to establish, by objective and rational means, the common intention which can be ascribed to the parties. That intention is ascertained by considering the ordinary meaning of the terms of the treaty in their context and in the light of the treaty’s object and purpose. Subsequent agreement as to the interpretation of the treaty, and subsequent practice which establishes agreement between the parties, are also to be taken into account, together with any relevant rules of international law which apply in the relations between the parties. Recourse may also be had to a broader range of references in order to confirm the meaning arrived at on that approach, or if that approach leaves the meaning ambiguous or obscure, or leads to a result which is manifestly absurd or unreasonable.”

29.

Since there has been some comparison between the French and English wording of Article 6(2), Article 33 of the Vienna Convention may also be relevant:

“1.

When a treaty has been authenticated in two or more languages, the text is equally authoritative in each language, unless the treaty provides or the parties agree that, in case of divergence, a particular text shall prevail.

2.

A version of the treaty in a language other than one of those in which the text was authenticated shall be considered an authentic text only if the treaty so provides or the parties so agree.

3.

The terms of the treaty are presumed to have the same meaning in each authentic text.

4.

Except where a particular text prevails in accordance with paragraph 1, when a comparison of the authentic texts discloses a difference of meaning which the application of articles 31 and 32 does not remove, the meaning which best reconciles the texts, having regard to the object and purpose of the treaty, shall be adopted.”

30.

The UK/Canada Convention, like most bilateral double taxation treaties, is based on the OECD Model Tax Convention on Income and on Capital published by the Organisation for Economic Co-operation and Development (“the Model Tax Convention”). The Model Tax Convention states in its Introduction that its main purpose is to provide “a means of settling on a uniform basis the most common problems that arise in the field of international juridical double taxation”:

“As recommended by the Council of the OECD, Member countries, when concluding or revising bilateral conventions, should conform to this Model Convention as interpreted by the Commentaries thereon and having regard to the reservations contained therein and their tax authorities should follow these Commentaries, as modified from time to time and subject to their observations thereon, when applying and interpreting the provisions of their bilateral tax conventions that are based on the Model Convention.”

31.

The Commentaries on the Model Tax Convention are drafted and agreed upon by experts appointed to the Committee on Fiscal Affairs by the Governments of member countries. The Commentaries say at para 29.1 that they can be of great assistance “both in deciding day-to-day questions of detail and in resolving larger issues involving the policies and purposes behind various provisions”. They are relied on by tax officials and by taxpayers in conducting their businesses and planning their business transactions and investments.

32.

In Fowler v Revenue and Customs Comrs [2020] UKSC 22, [2020] 1 WLR 2227, Lord Briggs explained that guidance as to how a double taxation treaty is to be interpreted can be found in OECD Commentaries even where they post-date the treaty in question. The Commentaries should be “given such persuasive force as aids to interpretation as the cogency of their reasoning deserves” (see paras 16 and 18 of Lord Briggs’ judgment).”

Further, as summarised by Mummery J in Inland Revenue Commissioners v Commerzbank AG [1990] STC 285 at page 297, “A strictly literal approach to interpretation is not appropriate” and “It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd v. Babco Forwarding & Shipping (UK) Limited [1978] AC 141 at 152, “unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation””.

The issue in dispute in this appeal is the proper application of the DTC to the facts of this case and in particular the application of Articles 17 and 20 of the DTC to the SIPP Withdrawals made to Mr Masters from the TJM SIPP in the UK tax year ended 5 April 2020.

The Mr Masters maintains that, on the facts of his case, only Portugal (and not the UK) was entitled to tax the SIPP Withdrawals under either Article 17 (Pensions) or Article 20 (Income not Expressly Mentioned) of the DTC.

It is common ground between the parties that if the SIPP Withdrawals were “paid in consideration of past employment” then Article 17 provides that only Portugal, as Mr Masters’ state of residence at that time, was entitled to tax that income, and Article 20 is not applicable.

However, HMRC maintain that the SIPP Withdrawals do not fall within Article 17 because they were not “paid in consideration of past employment”.

HMRC further maintain that because the SIPP Withdrawals are not “subject to tax” in Portugal, Article 20 does not prevent the UK from taxing them.

Mr Masters accepts that, if the SIPP Withdrawals were not paid “in consideration of past employment”, Article 20 governs which Contracting State is entitled to tax them. However, Mr Masters’ position is that the SIPP Withdrawals are “subject to tax” in Portugal and therefore, under Article 20, they are only taxable in his State of residence, Portugal, so the UK is prevented from taxing them.

The burden of proof is on Mr Masters to make out his grounds of appeal and the standard of proof is the ordinary civil standard of the balance of probabilities.

The SIPP Withdrawals were “paid to” Mr Masters when he was resident in Portugal. The SIPP Withdrawals are not an annuity, but they are a pension or “other similar remuneration” to which Article 18 (pensions in respect of Government Functions) does not apply.

Article 17 will therefore apply to the SIPP Withdrawals if they were “paid in consideration of past employment”.

The phrase “paid in consideration of past employment” is not defined in the DTC and nor does it have any specific “meaning” for the purpose of UK tax law (within the terms of Article 3(3) of the DTC).

Further, this phrase should not be interpreted in line with the technical meaning of “consideration” in English contract law because such an approach would incorrectly constrain the interpretation by reference to “technical rules of English law”.

Mr Brinsmead-Stockham submits that “in consideration of” should be read as “in respect of” on the basis that:

Mr Stone disagrees, citing the guidance of Nugee LJ in the Court of Appeal decision in HMRC v Dolphin Drilling [2024] Ch 255 to support his assertion that it is generally unhelpful to replace the language actually used by the contracting state with other words which have a similar but not identical meaning. Nugee LJ states at [41] of that decision:

“So one should be wary of trying to lay down a definition of ordinary words; the meaning of an ordinary word is to be found not so much in a dictionary but in how it is in fact ordinarily used, and I think it is generally more helpful to tease out the meaning of ordinary words by providing illustrative examples of how they are used in everyday contexts.”

In any event, it is common ground between the parties that the SIPP Withdrawals are only “paid in consideration of past employment” if there is sufficient causal connection between the past employment and the SIPP Withdrawals. This is referred to in Vogel as a relevant causal connection (see Vogel on Article 18 MTC at [38]-[39]).

In order to determine issue one, we must decide whether the degree of relevant causal connection between Mr Masters’ employment with Tesco and the SIPP Withdrawals is sufficient to meet the condition that the SIPP Withdrawals are “paid in consideration of past employment”.

Mr Brinsmead-Stockham submitted on behalf of Mr Masters that, because of the following facts, the relevant causal connection between the employment and the SIPP Withdrawals has not been broken and is sufficient to meet the condition of being “paid in consideration of past employment”:

Mr Brinsmead-Stockham further submitted that:

HMRC’s position, as set out by Mr Stone, is that as a result of the following facts, the relevant causal connection between the SIPP Withdrawal and Mr Masters’ employment with Tesco is broken so that they do not meet the condition of being “paid in consideration of past employment”:

Mr Stone further submits that the transfer from the Tesco Pension Scheme to the TJM SIPP breaks the relevant causal link for the following reasons:

The degree of relevant causal connection is clearly sufficient and unbroken where an employer and employee (through salary sacrifice) contribute to an occupational pension scheme, which then pays a pension or similar remuneration out.

Equally the relevant causal connection is clearly broken where an employee receives a salary from their employer and then pays some of that salary into a SIPP which subsequently pays a pension or similar remuneration out.

The facts of this case fall somewhere between these two clear extremes.

The relevant causal connection with the employment is broken in the latter example because the salary has become the property of the employee before it is contributed to the pension.

Mr Masters’ position is different to the latter example because the Tesco Transfer Amount was transferred from one UK registered pension scheme to another UK registered pension scheme and none of it became his property until the SIPP Withdrawals were made.

The transfer of the Tesco Transfer Amount from the Tesco Pension Scheme to the TJM SIPP is not, in and of itself, sufficient to break the relevant causal connection with the Tesco employment.

We also do not accept the proposition that payments out of a SIPP can never be “paid in consideration of past employment” simply because a SIPP is an individual retirement scheme. Vogel states only that they are “generally excluded for lack of relation to past employment” (our emphasis), which acknowledges only that such retirement schemes are not generally used as a vehicle to provide an employment related pension, not that there is anything intrinsic to an individual retirement scheme that prevents it from having a sufficient relevant causal connection to past employment.

The fact that the OECD Commentary on Article 18 of the MTC does not set out circumstances in which payments from an individual retirement scheme may be “paid in consideration of past employment”, as it does for payments from a statutory social security scheme, is also not determinative. This may simply be because the OECD Commentary had previously stated that payments from statutory social security schemes were not “paid in consideration of past employment” so it needed to clarify the position by setting out the circumstances that would meet this requirement. On the contrary the OECD Commentary had never stated that payments from individual retirement schemes could not be “paid in consideration of past employment”.

The OECD Commentary on Article 18 of the MTC reads as follows:

“A social security pension may be said to be “in consideration of past employment” if employment is a condition for that pension. For instance, this will be the case where, under the relevant social security scheme:

-

the amount of the pension is determined on the basis of either or both the period of employment and the employment income so that years when the individual was not employed do not give rise to pension benefits,

-

the amount of the pension is determined on the basis of contributions to the scheme that are made under the condition of employment and in relation to the period of employment, or

-

the amount of the pension is determined on the basis of the period of employment and either or both the contributions to the scheme and the investment income of the scheme.”

The parties agreed that it would be possible for a SIPP to be funded by employer contributions and employee salary sacrifice payments throughout the period of employment. In such a scenario a payment from that SIPP would clearly meet these examples.

It follows that, in principle, payments from individual retirement schemes and more specifically SIPPs can meet the condition of being “paid in consideration of past employment”.

We find therefore that:

We move then to consider whether there are any other facts that reduce the degree of relevant causal connection between Mr Masters’ employment with Tesco and the SIPP Withdrawals to such an extent that the SIPP Withdrawals are not in fact “paid in consideration of past employment”.

There clearly are factual scenarios which could have such an effect. For example, where the period of pensionable service and the value of the capital transfer from an occupational pension scheme to a SIPP is proportionately low compared to the period of time that the capital transfer is held in a SIPP, or the value of the subsequent contributions that the employee makes to it. In those circumstances the relevant causal connection with the employment may be too low for any payments out of that SIPP to be “paid in consideration of past employment”.

However, the facts surrounding the SIPP Withdrawals are very different to the facts set out above. Relevantly:

We find that the above facts maintain the necessary degree of relevant causal connection between the SIPP Withdrawals and Mr Masters’ past employment with Tesco so that the SIPP Withdrawals are “paid in consideration of past employment”. None of the facts presented to us break or reduce that causal connection to the degree necessary for us to find that the SIPP Withdrawals were not “paid in consideration of past employment”.

We therefore find that the SIPP Withdrawals are within Article 17 of the DTC and, as Mr Masters was resident in Portugal at the time of the SIPP Withdrawals, the DTC allocates the taxation rights over them to Portugal.

As we have found in Mr Masters favour on Issue One, that disposes of the appeal and we do not need to consider Issue Two because the income would only fall to be considered under Article 20 if it did not fall within Article 17. However, at the parties’ request, and having heard evidence and full submissions on the point, for completeness we also set out below a brief summary of our views in respect of the Article 20 ground of appeal.

The SIPP Withdrawals are “items of income of a resident of a Contracting State” because they are items of income of Mr Masters who was resident in Portugal.

If the SIPP Withdrawals didn’t fall within Article 17, they would be “income of a class or from sources not expressly mentioned in” Articles 1-19 of the DTC.

The only matter in dispute on Issue Two is therefore whether the Appellant was “subject to tax [in Portugal] in respect [of the SIPP Withdrawals]”.

The phrase “subject to tax” is not defined in the DTC and does not have any specific meaning for the purpose of UK tax law (within the terms of Article 3(3) of the DTC).

Article 21 of the MTC which is equivalent to Article 20 does not contain the condition that the relevant income must be subject to tax in the State of Residence before the other Contracting State is prevented from taxing it.

Mr Brinsmead-Stockham submitted that a distinction is drawn generally in international taxation between the concepts of “liable to tax” and “subject to tax”. He submits that “liable to tax” concerns whether a person is within the charge to tax of a Contracting State and “subject to tax” concerns the tax treatment of specific income.

Mr Brinsmead-Stockham further submits that income will be “subject to tax” unless it falls entirely outside the ambit of the tax code or is exempt in the sense that it is entirely excluded from affecting the charge to tax in the Contracting State.

There is a discrepancy between the Portuguese and English Language version of the DTC as the phrase used in the Portuguese language version of Article 20 is the equivalent to “liable to tax”. Mr Brinsmead-Stockham asserts that the best way to reconcile the two equally authoritative language versions of the DTC is to recognise that the meaning of “liable to tax” and “subject to tax” is not fixed or absolute and err on the side of a broad construction of the “subject to tax” concept when used in the English language version.

Mr Masters was not generally exempt from Portuguese taxation in the relevant periods and foreign pension income is generally within the scope of the PIT so the only question is whether the exemption from PIT of foreign pension income under the NHR Scheme means that such income is not “subject to tax” in Portugal for the purpose of Article 20. Mr Brinsmead-Stockham maintains that it does not. This is because the foreign pension income is taken into account when determining the applicable Portuguese tax rate of Mr Masters’ other income that is subject to PIT. As such the pension income is included in Mr Masters’ PIT tax computation, which can have a material impact on his total liability to PIT by increasing the rate of tax payable in respect of other income. Consequently, Mr Brinsmead-Stockham submits that Mr Masters’ foreign pension income is effectively charged to tax in Portugal and therefore Article 20 prevents the UK from taxing it.

Mr Stone submits that Mr Masters was not “subject to tax” in Portugal for the purpose of Article 20 in respect of the SIPP Withdrawals, because he was exempt from PIT on the SIPP Withdrawals under the NHR Scheme.

Mr Stone relies in part on the decision of Weiser v HMRC [2012] UKFTT 501 (TC) (“Weiser”) which concerned the interpretation of Article XI(2) of the UK-Israel Double Tax Convention which reads:

“Any pension …. derived from sources within the United Kingdon by an individual who is resident of Israel and subject to Israel tax in respect thereof, shall be exempt from United Kingdom tax.”

Weiser involved a similar scheme to the Portuguese NHR Scheme in that, UK pension income was exempt from Israel tax for the first ten years after an individual became Israeli resident (unless they elected to be taxed in Israel on that income).

In Weiser the FTT found that there is a distinction between the use of the phrase “liable to tax” and “subject to tax” in double tax treaties, with the latter requiring the person to actually be required to pay tax in respect of the specific income, and concluded that:

“Income which is exempted from taxation cannot during the currency of the exemption be income in respect of which an individual can be said to be subject to tax.”

Following the FTT’s reasoning in Weiser, Mr Stone submits that the SIPP Withdrawals must actually be taxed in Portugal to meet the condition of being “subject to tax” in Portugal so that Article 20 would prevent them from being taxed in the UK.

Mr Stone further submits that there is no proper basis on which to distinguish the decision in Weiser from this case.

Mr Stone also referred us to Article 21 of the OECD Draft Model that does not contain a subject to tax provision and the OECD Commentary on that Article which states at paragraph 2 as follows:

“As the Article is drafted, this rule applies irrespective of whether the right to tax is in fact exercised. If the income arises in the other Contracting State, that State cannot therefore impose tax even if the income is not taxed in the first mentioned State. In order to avoid non-taxation, the Contracting States can agree to limit the scope of the Article to items of income which are subject to tax in the Contracting States of which the recipient is a resident and modify the Article in the way.”

Mr Stone submits that this commentary makes clear that the term “subject to tax” is intended to require actual taxation on the specific income.

Further the commentary on Article 21 of the MTC which also doesn’t include a “subject to tax” provision provides:

“In order to avoid non-taxation, Contracting States may agree to limit the scope of the Article to income which is taxed in the Contracting State of which the recipient is a resident and may modify the provisions of the paragraph accordingly…”

Mr Stone referred us to a number of academic pieces that also supported his submission that income will only be considered “subject to tax” in a Contracting State if it is actually taxed in that Contracting State.