Pension taxation

The Commission is determined to remove any remaining tax obstacles to a Single Market for occupational pensions (second pillar pensions). Since the entry into force of the Pension Fund Directive on 23 September 2005, the pressure on these tax obstacles is increasing.

The taxation of occupational pensions in the European Union

Most Member States tax occupational pensions according to the EET system (Exempt contributions, Exempt investment income and capital gains of the pension institution, Taxed benefits) or ETT principle (Exempt contributions, Taxed investment income and capital gains of the pension institution, Taxed benefits). This means that:

the contributions by both employer and employee are tax deductible,
the investment results of the pension fund are usually exempt (they are taxed only in Denmark, Italy and Sweden) and
the benefits are taxed.

The Commission supports this system of deferred taxation since contributions to pension funds diminish a person's ability to pay taxes and since it encourages citizens to save for their old age. In addition, it will help Member States to deal with the demographic time-bomb, as they will be collecting more tax revenues at a time when more elderly people may call on the State for care.

However, many Member States did not allow tax deduction for pension contributions paid to pension funds in other Member States. This effectively sealed off their national pension markets from competition from other Member States and created major obstacles to pan-European funds and the free movement of workers.

Background

Commission initiatives

In a first step, on 19 April 2001 the Commission issued a Communication (IP/01/575 ; MEMO/01/142 ) on the elimination of tax obstacles to the cross-border provision of occupational pensions. On the basis of the EC Treaty and the case-law of the European Court of Justice in Luxembourg (ECJ) the Commission concluded in that Communication that the Member States were not allowed to restrict the freedom to provide services and the free movement of workers by refusing tax deductibility for pension contributions paid to pension funds in other Member States.

The Communication of April 2001 also developed ideas on the exchange of information and the elimination of double taxation.

Reactions from the Council, the European Parliament and the European Economic and Social Committee

Both the European Parliament and the Economic and Social Committee gave favourable opinions on the Communication in November 2001.

After an initially favourable reaction to the Commission Communication (IP/01/575 ; MEMO/01/142 ) in October 2001, the Council failed to reach agreement in December 2002..

Infringement procedures

In a second step, the Commission launched new infringement proceedings (IP/03/179 ) under Article 258 of the EC Treaty against Belgium, Spain, France, Ireland, Italy, Portugal and the United Kingdom. The Commission also continued its proceedings against Denmark (IP/03/965 ), referring Denmark to the Court of Justice.

An overview of the infringement procedures on the tax deductibility of pension contributions paid across the border is below:.

On 17 December 2003 the Commission sent reasoned opinions to Belgium, Portugal, Spain and France (IP/03/1756 ).

On 8 July 2004 it decided to refer Spain to the Court of Justice and to send a formal request to the United Kingdom to amend its legislation (IP/04/873 ).

On 22 October 2004 the Commission decided to refer Belgium to the Court of Justice and to send a reasoned opinion to Italy to amend its legislation (IP/04/1283 ).

On 20 December 2004 the Commission decided to send a reasoned opinion to Sweden to amend its legislation (IP/04/1500 ).

On 13 January 2006 the Commission sent Germany a reasoned opinion concerning legislation on the pension-savings grant, the so called "Riester-Rente" (IP/06/32 )

On 4 July 2006 the Commission decided to refer Germany to the Court of Justice over this legislation (IP/06/919 ).

On 9 January 2007 the Commission closed the case against Spain, since Spain had changed it law to eliminate the discrimination (IP/07/19 )

On 30 January 2007 the ECJ ruled on Commission vs Denmark, C-150/04 (Press release Mex 07/130 ).

On 5 July 2007 the ECJ ruled on Commission vs Belgium, C-522/04

In practice, the overwhelming majority of Member States with the EET or ETT system now also allow tax deductibility of such cross-border payments. The new focus of the Commission will be on any discrimination concerning the cross-border transfer of pension capital. In some Member States domestic transfers are tax exempt, whereas cross-border transfers are taxed or forbidden.

There is also an issue of discriminatory taxation by the source State of dividend and interest payments to pension funds established elsewhere in the European Economic Area. See an overview of the infringement cases that the Commission has opened on this topic.

ECJ cases further to a request for a preliminary ruling on pension taxation

Bachmann, Case C-204/90)
Wielockx, Case C-80/94
Safir Case C-118/96
Danner Case C-136/00
Skandia/Ramstedt Case C-422/01
Turpeinen Case C-520/04

Articles

An article published in July 2003 discusses two Court cases and provides an overview of the issues at stake.

An article discusses the developments in December 2003, especially the announcement by France and Spain to end the discrimination of foreign pension funds.

An article presents an overview of developments up to 1 July 2004 per Member State.

An article published in September 2005 discusses to what extent taxation is still an issue for pan-European pension funds.

An article published in March 2007 discusses the consequences of Commission vs Denmark, Case C-150/04.

An article published in September 2007 discusses the consequences of Commission vs Belgium, Case C-522/04.

Frequently asked questions

Double taxation, cross-border workers, migrant workers, pensioners