The First-tier Tribunal in Paul Weiser v HMRC  UKFTT 501 (TC) (published on 28 August) decided that an exemption from UK tax was not available under the UK-Israel double tax treaty (“the Treaty”) in relation to a UK pension which was exempt from tax in Israel.
Mr Weiser is an Israeli citizen who is resident there. He received a UK pension. Under the laws of Israel, the pension income was exempt from tax in Israel as Mr Weiser had been resident in Israel for less than ten years and had not elected to be taxed on that income. Nevertheless, Mr Weiser claimed to be exempt from UK tax on his pension income under the Treaty, which says:
“Any pension … derived from sources within the United Kingdom by an individual who is a resident of Israel and subject to Israel tax in respect thereof, shall be exempt from United Kingdom tax.”
HMRC argued that the expression “subject to Israel tax in respect thereof” required that the pension must be within the charge to tax in Israel. That is to say, the UK pension income must be included in the individual’s Israeli tax computation with the result that Israeli tax would ordinarily be payable on the pension income subject to any deductions or allowances for relief (e.g. a personal allowance). They drew a distinction between the phrases ‘liable to tax’ and ‘subject to tax’, arguing that the former refers to the situation where a State has a right to tax income whereas ‘subject to tax’ refers to where a State exercises its right to tax income (unless there are any deductions or reliefs such as, say, a personal allowance).
As the pension income was exempt from Israeli tax in this case, it was not, HMRC argued, ‘subject to Israel tax.’
The Tribunal’s starting point was to look at how the words of the Treaty should be construed. It held that the treaty should be given a purposive interpretation consistent with the purposes of the Treaty. The purpose of the Treaty was to prevent double taxation and not to “enable double non-taxation.” They referred to the following principle laid down in the case of Bayfine:
“the Treaty should be interpreted to avoid the grant of double relief as well as to confer relief against double taxation.”
The Tribunal then considered the meaning of ‘subject to tax’. It found that ‘subject to tax’ means that the individual must actually pay tax on the income in their country of residence unless the income is so small it is covered by personal allowances in that country. Further, an individual will not be 'subject to tax' if the income in question is exempted from tax because of the law in that country provides a statutory exemption e.g. where the income belongs to a charity or a pension fund.
This is a significant case, because it highlights how a subtle differences in the wording of a tax treaty can make a great difference to an individual’s tax position. The phrases ‘liable to tax’ and ‘subject to tax’ of course appear frequently in a number of treaties.