Many European citizens depend on their pension income upon retirement. Future generations will one day benefit from a pension too, and people of working age pay taxes and social contributions to help support current pensioners.
Taxation of occupational pensions in the EU
The taxation of pensions is not harmonised at EU level and thus remains a competence of EU countries.
Countries tax occupational pensions according to the EET system (exempt contributions, exempt investment income and capital gains of the pension institution, taxed benefits) or the 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 tax-exempt;
- the benefits for the recipient are taxed.
The Commission supports deferred taxation of pension investments since contributions to pension funds encourage citizens to save for retirement. In addition, a well-designed pension tax system helps EU countries deal with the economic impact of an ageing population.
Non-discriminatory taxation of investments in pension products
While EU countries maintain competence in setting tax rules for pension investments, they may not design their pension tax systems in a manner that restricts cross-border investments in pension funds in other EU countries (e.g. by not allowing tax deductions for pension contributions paid to such pension funds, or taxing investment income and capital gains of pension institutions as well as benefits paid out to the pensioners in a discriminatory manner).
This effectively leads to protectionism of national pension markets by eliminating competition from pension product providers of other EU countries. Non-discriminatory taxation mitigates obstacles to the creation of pan-European pension funds; tackles distortive limitations to the free movement of workers; and facilitates the free provision of services and freedom of capital movements in the internal market, which are essential for cross-border financial integration in the EU.
Background
The Commission has taken a variety of initiatives in the past to support the elimination of tax obstacles. In 2001, the Commission issued Communication IP/01/575 (MEMO/01/142) on the elimination of tax obstacles to the cross-border provision of occupational pensions, and followed up, where necessary, with infringement procedures against EU countries to rectify violations of the fundamental freedoms in the field of pension taxation.
DG TAXUD continues to focus on possible discriminatory tax obstacles in EU countries’ legal frameworks that impede cross-border investment in the EU and jeopardise the mobilisation of private savings for pension savings purposes.
In this regard, the tax treatment of Institutions for the provision of Occupational Retirement Provisions (IORPs) is of great importance. IORPs are financial institutions that manage collective retirement schemes for employers in order to provide benefits to employees.
Particular attention is given to:
- the tax deductibility of technical reserves of IORPs;
- the taxation of outbound income of IORPs while domestically generated income is tax-exempt;
- taxation on net basis of domestic income and taxation on a gross/reduced basis of outbound income; and
- the existence of more burdensome administrative procedures for outbound income.