OPINION OF ADVOCATE GENERAL

STIX-HACKL

delivered on 1 June 2006 1( )

Case C-150/04

Commission of the European Communities

v

Kingdom of Denmark

(Treaty infringement – Articles 39 EC, 43 EC, 49 EC and 56 EC – Income tax – Pensions – Refusal of tax relief on contributions made to pension institutions in other Member States – Justification on grounds of cohesion of the tax system – Convention for the avoidance of double taxation)

I – Introduction

1. In the present action for failure to fulfil Treaty obligations, the Commission seeks a declaration that by introducing and maintaining a system for life assurance and pensions under which tax deductions and tax exemptions for contributions (Paragraphs 18 and 19 of the Pensionsbeskatningslov (Law on the taxation of pensions)) ( )are granted only for contributions pursuant to contracts entered into with pension institutions established in Denmark, whereas no such tax advantage is granted for payments pursuant to contracts entered into with pension institutions established in other Member States (Paragraphs 53A and 53B of the Pensionsbeskatningslov), the Kingdom of Denmark has failed to fulfil its obligations under Articles 39 EC, 43 EC, 49 EC and 56 EC.

2. These proceedings essentially raise the question of whether, and, if so, to what extent a difference in the tax treatment of contributions paid to pension institutions established outside the Member State concerned can be justified on grounds of cohesion of the tax system, in order to ensure, above all, that the corresponding pension benefits are properly taxed.

II – Legal framework: national provisions

A – Law on the taxation of pensions

3. The Pensionsbeskatningslov (‘PBL’) ( ) contains provisions governing the taxation of pension schemes including life assurance contracts. In so doing, it makes a basic distinction between two categories of pension schemes which are treated differently for tax purposes.

4. Schemes falling into the first category – under Part I of the PBL – are privileged for tax purposes in so far as contributions to such a scheme are deductible or exempt.

5. Other schemes are dealt with in Part IIA of the PBL.

6. Employers’ contributions to employees’ pension schemes are deductible as a business expense. ( ) This applies to both Part I schemes and to Part IIA schemes.

1. Part I of the PBL – pension schemes benefiting from tax relief

7. In accordance with the provisions of the PBL, members of a Part I pension scheme can deduct their contributions to the pension scheme or have them disregarded. ( ) Both contributions to schemes which have been set up by virtue of an employment contract and contributions to personal pension schemes enjoy tax advantages.

8. Ongoing investment returns are taxed at a rate of 15%. ( ) The tax is calculated by each pension provider and is paid out of the contributions made by insured persons.

9. Payments from a Part I scheme are taxed in the hands of the beneficiary. Scheduled payments from a pension scheme with periodic payments are taxed as personal income at the relevant marginal tax rate. ( ) A charge of 40% is levied on scheduled payments from schemes resulting in a lump sum. ( ) Premature payments from of all types of pension scheme are taxed at 60% on the sum withdrawn. ( )

10. In order to benefit from tax advantages under Part I, the conditions of Chapter 1 of the PBL (Paragraphs 2 to 17) must be met. Requirements are imposed, inter alia, with regard to pension age, persons entitled to benefit and mode of payment. Requirements are also imposed on pension institutions which provide schemes. The institutions in question must be life assurance societies, pension funds or financial institutions which satisfy the following conditions:

Life assurance societies must (1) have their registered office in Denmark or (2) pursue life assurance business through an establishment in Denmark and be authorised by the financial supervision authorities to pursue life assurance business or (3) pursue life assurance business through a branch office in Denmark and possess an authorisation issued in another State of the European Community.

Pension funds must comply with (1) the Law on the supervision of pension funds, which requires a registered office in Denmark, or (2) the Law on financial undertakings, which applies to certain pension funds with a registered office in Denmark and to foreign pension funds which are authorised in another State of the European Community and which pursue their activities through a branch office in Denmark.

Financial institutions must (1) be authorised by the financial supervision authorities to operate a financial institution in Denmark, which requires a registered office in Denmark, or (2) be foreign credit institutions which are authorised in another State of the European Community and which pursue their activities through a branch office in Denmark.

2. Part IIA of the PBL – pension schemes not benefiting from tax relief

11. Part IIA contains provisions governing pension schemes which do not fall within the scope of Part I because they do not meet the relevant conditions and pension schemes whose members have opted not to be taxed under Part I. Part IIA comprises Paragraph 53A and Paragraph 53B and concerns, above all, pension schemes with foreign pension institutions. It provides, inter alia, as follows:

‘Part IIA Pension schemes, insurances, etc. subject to income tax

Paragraph 53A

(1) The provisions of subparagraphs 2 to 5 shall apply to

1. life assurance contracts which do not fall within the scope of Chapter 1,

2. life assurance contracts which meet the conditions of Chapter 1 but with respect to which the policyholder, on entering into the insurance contract, opted not to be taxed in accordance with the provisions of Part I,

3. schemes with pension funds which do not fall within the scope of Chapter 1,

4. schemes with pension funds which meet the conditions of Chapter 1 but with respect to which the persons entitled to benefit opted not to be taxed in accordance with the provisions of Part I, and

5. sickness and accident insurance policies where the policyholder is the insured person.

(2) For the purposes of calculating taxable income, it shall not be permitted to deduct premiums or contributions to pension and other insurance schemes listed in subparagraph 1. For the purposes of calculating an employee’s taxable income, premiums or contributions paid by his present or a former employer shall be included ...

(3) For the purposes of calculating taxable income, returns from life assurance contracts and pension schemes listed in subparagraph 1 shall be included …

(4) …

(5) For the purposes of calculating taxable income, benefits payable under pension and other insurance schemes listed in subparagraph 1 shall be disregarded.

Paragraph 53B

(1) Without prejudice to the provisions of Paragraph 53A, where in respect of life assurance contracts listed in point 1 of Paragraph 53A(1), schemes with pension funds listed in point 3 of Paragraph 53A(1) and sickness and accident insurance policies listed in point 5 of Paragraph 53A(1) the conditions of subparagraphs 2 and 3 are met the provisions of subparagraphs 4 to 6 shall apply. The same shall apply in respect of foreign pension schemes which have been established with financial institutions.

(2) It shall be a requirement that the pension or other insurance scheme listed in subparagraph 1 was entered into at a time when the policyholder or person entitled under the scheme was not liable to tax under Paragraph 1 of the Law on deduction of tax at source or when, notwithstanding that person’s liability to tax under Paragraph 1 of the Law on deduction of tax at source, he was resident abroad, on the Faeroe Islands or in Greenland within the meaning of the provisions of a double tax convention.

(3) It shall be a requirement that all contributions to pension or other insurance schemes referred to in subparagraph 1 made during the period in which the policyholder or person entitled under the scheme was neither liable to tax nor resident in Denmark were deducted from his positive taxable income in accordance with the tax law applicable in the State in which the policyholder or person entitled under the scheme was liable to tax or resident at the time when the contributions were made or that the contributions were paid by an employer in such manner that in accordance with the tax law applicable in the State in which the policyholder or person entitled under the scheme was liable to tax or resident at the time the contributions were made they were disregarded for the purpose of calculating that person’s taxable income.

(4) Paragraph 53A(2) shall apply in respect of premiums and contributions to pension and other insurance schemes referred to in subparagraph 1.

(5) For the purposes of calculating taxable income, investment returns including interest and profit entitlements derived from pension and other insurance schemes referred to in subparagraph 1 shall be disregarded.

(6) For the purposes of calculating taxable income, benefits from pension and other insurance schemes referred to in subparagraph 1 shall be included … For the purposes of calculating taxable income, those benefits shall be disregarded where they are derived from contributions made by the policyholder or person entitled under the scheme after he became liable to tax or resident in Denmark and where pursuant to subparagraph 4 and Paragraph 53A(2) deduction of the contributions for income tax purposes was not permitted.’

12. Contributions to schemes which fall within the scope of Part IIA are thus non-deductible or have to be included as taxable income.

13. Ongoing investment returns are taxed as returns from capital. ( ) If the pension scheme falls within the scope of Paragraph 53B, however, ongoing returns are not taxable.

14. Payments from pension schemes which fall within the scope of Paragraph 53A are tax-free. Payments from pension schemes which fall within the scope of Paragraph 53B are taxed as personal income if the policyholder was permitted to deduct his contributions to the pension scheme or they were disregarded.

15. Paragraph 53B concerns pension schemes which persons abroad joined at a time when they were not resident in Denmark. If the insured person transfers his residence to Denmark and is still resident in Denmark when the benefits of the scheme become payable, those payments are taxable in Denmark. In those cases in which pursuant to a double taxation convention Denmark as the State of residence enjoys the right to tax, Paragraph 53B provides the legal basis for Denmark to tax payments from foreign pension schemes.

3. Taxation of payments from pension schemes pursuant to double taxation conventions entered into by Denmark

16. Denmark has entered into conventions for the avoidance of double taxation with a number of States (‘Double Taxation Convention’ or ‘DTC’). The conventions adopt the principles drawn up by the Organisation for Economic Cooperation and Development (OECD) in its Model Tax Convention and govern, inter alia, the right to tax benefits from private pension schemes. Under Article 18 of the OECD Model Tax Convention, private pensions are generally taxable in the State of residence of the recipient.

17. DTCs which have been entered into with France, ( ) Luxembourg, ( ) the Netherlands, ( ) Spain ( ) and Austria ( ) contain provisions which correspond to Article 18 of the OECD Model Tax Convention. A similar provision is to be found in the DTC entered into with Switzerland. ( )

4. Deductions for contributions to foreign pension schemes pursuant to double taxation conventions entered into by Denmark

18. Some of the DTCs entered into by Denmark permit insured persons resident in one Contracting State on calculating their taxable income in that State to deduct contributions made to pension schemes established in the other Contracting State. That is the position under DTCs entered into with the Netherlands, ( ) the United Kingdom ( ) and Sweden. ( ) The DTC entered into with Switzerland contains a similar provision. ( )

III – Pre-litigation procedure

A – Letter of formal notice

19. By letter of formal notice of 5 April 1991, letter of 31 July 1992 and supplementary letter of formal notice of 11 April 2000, the Commission brought to the attention of the Danish authorities that certain provisions on the taxation of pensions are incompatible with Articles 39, 43, 49 and 56 of the EC Treaty.

20. The letters of formal notice concern the provisions of Danish law governing the question whether for the purposes of calculating taxable income contributions to pension schemes are deductible or not. Under those provisions, contributions are deductible if they are made pursuant to pension schemes which have been arranged with pension institutions established in Denmark. Conversely, contributions to pension schemes arranged with pension institutions established in other Member States are not deductible. In its letters, the Commission argues that such difference in tax treatment constitutes an infringement of the principles of the freedom of movement for persons and capital and of the freedom to provide services. In the Commission’s view, cohesion of the tax system does not constitute objective justification for the provisions of Danish law.

21. Having regard to the Danish Government’s reply of 12 March 1992 to the letter of formal notice, the government’s letter of 22 December 1992 and the government’s reply of 29 June 2000 to the supplementary letter of formal notice and taking into account meetings held on 4 November 1997 and 14 January 2000 between the Danish authorities and the Commission in which Denmark set out its position, the Commission decided to send Denmark a reasoned opinion.

B – Reasoned opinion

22. On 5 February 2003, the Commission addressed a reasoned opinion to Denmark. In it the Commission concluded that, by maintaining in force provisions under which contributions to pension schemes are deductible or may be disregarded only if the scheme has been arranged with a pension institution established or having a branch office on the national territory, Denmark has failed to fulfil its obligations in accordance with Articles 39, 43, 49 and 56 of the EC Treaty.

23. By letter of 15 April 2003, the Danish Government replied to the Commission’s reasoned opinion. Referring to Danner, ( ) in particular at paragraph 31, the Danish Government acknowledges that the provisions governing the taxation of pensions may constitute a restriction on the free movement of workers, on the freedom to provide services and on the freedom of establishment.

24. The Danish Government takes the view, however, that the restrictions at issue are justified by the need to ensure cohesion of the Danish tax system. In the government’s submission, the Danish provisions on the taxation of pensions are symmetrical because a direct connection exists between deductibility of contributions and taxation of payments from a scheme.

25. In the Danish Government’s view, the judgment in Danner confirms without a shadow of a doubt that it is permissible to take cohesion of the tax system – established in Bachmann – into account, thereby justifying restrictions on the free movement of workers, on the freedom to provide services and on the freedom of establishment.

IV – Proceedings before the Court

26. By application lodged at the Court Registry on 23 March 2004, the Commission seeks a declaration that by introducing and maintaining in force a system for life assurance and pensions under which tax deductions and tax exemptions for contributions (Paragraphs 18 and 19 of the PBL) are granted only for contributions under contracts entered into with pension institutions established in Denmark, whereas no such tax relief is granted for contributions pursuant to contracts entered into with pension institutions established in other Member States (Paragraphs 53A and 53B of the PBL) the Kingdom of Denmark has failed to fulfil its obligations under Articles 39 EC, 43 EC, 49 EC and 56 EC and an order that the Kingdom of Denmark pay the costs.

27. By its defence lodged on 10 July 2004, Denmark seeks the dismissal of the action as unfounded and an order that the Commission pay the costs.

28. The written procedure was concluded after reply and rejoinder had been lodged and after the Kingdom of Sweden had been granted leave to intervene in support of the forms of order sought by Denmark.

29. On 31 January 2006, a hearing took place which both parties and the Kingdom of Sweden attended.

V – Assessment of the action

A – Introductory remarks

30. The Court has already had the opportunity on several occasions to interpret the fundamental freedoms vis-à-vis the taxation of supplementary pensions – whether occupational pensions, ‘second-pillar’ pensions or voluntary pension provision, ‘third-pillar’ pensions ( ) – in the Member States. The starting point for this case-law can be found in Bachmann ( ) and Commission v Belgium ( ) concerning Belgian legislation which permitted the deduction of insurance contributions only if the payments were made to domestic insurance companies. The Court held that to constitute an infringement of the freedom of movement for workers and of the freedom to provide services which was, however, justified by the need to maintain the cohesion of the tax system.

31. The case of Wielockx ( ) concerned Netherlands legislation which partially denied taxable persons the option of making a deduction in respect of contributions to a pension reserve while at the same time in the event of payments being drawn out of that reserve a DTC prevented their taxation in the Netherlands. The Court held this to be an unjustified infringement of the freedom of establishment.

32. In Safir, ( ) a case concerning Swedish law, the Court held that the freedom to provide services precludes a difference in the tax treatment of capital life assurance policies depending on whether or not the company with which the contract was entered into is established in that Member State.

33. At issue in Danner ( ) were provisions of Finnish law according to which, if the insurer is established in another Member State, the possibility of deducting, for income tax purposes, contributions to a voluntary pension scheme is restricted or even denied. In the Court’s view, the Treaty provisions on the freedom to provide services preclude measures of that kind.

34. Finally, Skandia and Ramstedt ( ) was concerned with the tax treatment of employer contributions to an occupational pension insurance scheme in Sweden. The Court’s view is that the Treaty provisions on the freedom to provide services preclude a measure according to which contributions to a foreign insurer are to be treated differently from those made to a domestic insurer, provided that the pension scheme at issue fulfils in all other respects the requirements of national law relating to occupational pension schemes.

35. The present Treaty infringement proceedings are evidently linked to the Commission communication on the elimination of tax obstacles to the cross-border provision of occupational pensions. ( ) In that regard, it is of interest to note that the Commission has commenced similar Treaty infringement procedures concerning the taxation of pensions against several Member States ( ) and that the relevant actions against Belgium ( ) and Spain ( ) are pending.

B – Restrictions on the fundamental freedoms

1. Main arguments of the parties

36. In the Commission’s view, the fact that an insured person may only deduct insurance contributions he has made from his income if the relevant pension institution is established in Denmark constitutes a restriction on the freedom to provide services, the free movement of workers, the freedom of establishment and on the free movement of capital.

37. The Danish Government concedes that the Danish provisions are apt to restrict the freedom to provide services, the free movement of workers and the freedom of establishment. On the other hand, it takes the view that they do not affect the free movement of capital because Article 56 EC does not prohibit restrictions which do not relate to the movement of capital but which result indirectly from restrictions on other fundamental freedoms. ( )

2. Legal appraisal

38. Having regard to the arguments advanced by the Danish Government which did not contest the description of the national provisions at issue, ( ) and of the abovementioned case-law, some brief observations are required in order to assess the restriction on the free movement of workers, the freedom of establishment, the freedom to provide services and the free movement of capital.

Freedom to provide services (Article 49 EC)

39. The absence of a right of tax deduction or tax exemption for contributions to foreign pension schemes results, first, in a situation where insured persons resident in Denmark lack an important – fiscal – incentive to make pension arrangements with pension institutions established in Member States other than Denmark. ( )

40. At the same time, such legislation results in a situation where those foreign pension institutions taking advantage of the freedom to provide services cannot service the Danish market on an equal basis: thus, they are faced with the alternative of either not operating on the Danish market or of establishing themselves in Denmark. As a result, this constitutes a restriction on the right to provide services originating in another Member State in Denmark.

41. In passing, it appears noteworthy that in so far as the legislation in question concerns life assurance companies the Commission – to this extent differing from its approach in Case C‑522/04 and Case C‑47/05 – has not based its plea on Directives 92/96/EEC ( ) and 2002/83/EC. ( )

42. In addition to addressing the issue of the restrictive nature of the legislation in question, which in itself is hardly problematic, the Court could use the opportunity, moreover, to clarify its stance – as has been called for in the literature on many occasions and by some of the Advocates General ( ) – with regard to the discriminatory nature of national legislation, such as that at issue in these proceedings, which makes distinctions on the basis of the place of establishment of the insurance company or the pension institution.

43. Both in Danner and in Skandia and Ramstedt the Court left open the question whether such provisions constitute direct or indirect discrimination or non-discriminatory restrictions.

44. This lack of clarity appears unsatisfactory, in particular, because of the Court’s formal insistence on the principle, ( ) that direct discrimination on grounds of nationality or according to the location of an undertaking’s registered office can not be justified by overriding reasons in the public interest where those reasons are not specified in the Treaty. ( )

45. In Danner, Advocate General Jacobs considered the Finnish legislation at issue in that case which linked tax advantages to the conclusion of an insurance contract with a domestic company to constitute overt discrimination on grounds of nationality, whereas, in Skandia and Ramstedt, Advocate General Léger labelled the corresponding Swedish legislation to be indirectly discriminatory.

46. In my opinion, the latter view is more convincing since the relevant national legislation does not differentiate according to the location of the registered office or to the nationality of the service provider, but rather according to the origin of the service: ( ) only those foreign insurers which do not maintain an establishment within the national territory are disadvantaged. ( )

47. That such indirectly discriminatory legislation may be justified by overriding reasons in the public interest which are not specified in the Treaty arguably corresponds to the current position according to case-law. ( ) In those circumstances, it appears to be more convincing in any event to approach the difference in tax treatment of contributions according to the place of establishment of the payee as a matter of discrimination and not simply as a restriction. It must be concluded, therefore, that the legislation in question results in the indirect discrimination against insurers established abroad.

Free movement of workers and freedom of establishment (Articles 39 EC and 43 EC)

48. The Danish provisions according to which there is, in particular, no right of tax deduction for contributions paid to foreign pension schemes particularly affects migrant workers and self-employed persons from other Member States. Such workers or self-employed persons who transfer their residence to Denmark and who have already made pension arrangements in another Member State going beyond the compulsory State pension scheme must accept a tax disadvantage compared with Danish pension schemes if they wish to maintain their foreign pension arrangements. ( )

Free movement of capital (Article 56 EC)

49. The condition governing the availability of tax relief, that the pension institutions must be established in Denmark is – as I have already concluded – apt to dissuade insured persons from making pension arrangements with pension institutions established in other Member States. The Danish legislation could thereby constitute an obstacle to the free movement of capital in the form of payments to and by pension institutions.

50. In that connection, it must be observed that in the nomenclature annexed to Directive 88/361/EEC ( ) ‘transfers in performance of insurance contracts’ and notably ‘premiums and payments in respect of life assurance’ are listed as capital movements. ( )

51. The Danish Government refers in that connection, however, to Bachmann, ( ) in which it was held that ‘Article 67 [repealed by the Treaty of Amsterdam] does not prohibit restrictions which do not relate to the movement of capital but which result indirectly from restrictions on other fundamental freedoms’. In that case, the Court held that the free movement of capital had not been restricted since the tax treatment of insurance contributions did not of itself preclude the payment of insurance contributions to an insurer established abroad.

52. That approach cannot be regarded as having been superseded by reason of the recasting of the free movement of capital following the Maastricht Treaty. It was, in fact, also the basis for the judgment in Safir which concerned the taxation of premiums payable in Sweden towards a capital life insurance contract. ( )

53. To the extent that the differentiation which is at issue in this case affects only the deductibility or tax exemption for pension contributions, that approach could accordingly be applied here, thus a restriction on the free movement of capital would have to be denied. In respect of an infringement of the Treaty provisions on the free movement of capital, the Commission’s action, therefore, would have to be dismissed.

C – Justification on overriding grounds in the public interest

1. Main arguments of the parties

54. The Danish Government argues that the legislation at issue is justified by overriding reasons in the public interest and points in that regard to the necessity of effective fiscal controls and of ensuring cohesion of the tax legislation. In the Commission’s view, neither argument constitutes justification. In any event, it is impossible to reconcile the restrictions on the fundamental freedoms with the principle of proportionality.

Effectiveness of fiscal controls

55. In the Commission’s view, Directive 77/799/EEC ( ) concerning mutual assistance by the competent authorities of the Member States in the field of direct taxation and taxation of insurance premiums ensures the recovery of income taxes in other Member States. Denmark cannot justify the application of the legislation in question, therefore, by reference to difficulties in obtaining the information needed to calculate correctly the tax due.

56. The Danish Government takes the view that the effectiveness of Directive 77/799 is restricted by the fact that national law determines the information available to the Member States which they are required to share under the terms of the directive. Admittedly, supervision can take place on the basis of voluntary cooperation between the Danish authorities and foreign pension institutions. The scope of such cooperation is limited, however, because foreign financial institutions can rely on their obligations of professional secrecy.

Cohesion of the tax legislation

57. The Commission argues that cohesion of the tax legislation requires there to be a direct correlation between deductibility of contributions and taxation of benefits. That correlation must exist at the level of an individual taxpayer. ( ) Furthermore, it follows from Bachmann that there is an obligation to permit the deduction of contributions paid to a pension scheme in another Member State, unless the State in question is denied the possibility of taxing the benefits resulting from that scheme.

58. In the Danish Government’s view, it is justified in denying deductibility, in accordance with Bachmann. Cohesion is assured in respect of the individual taxpayer and a direct link exists between deduction of contributions and taxation of benefits. ( ) It is in conformity with the EC Treaty, therefore, to preclude the possibility of deducting premiums for voluntary pension insurance which have been paid to pension institutions established in other Member States, provided that national law precludes the taxation of pensions paid in consideration of premiums or contributions which were not deducted. ( ) It is most certainly the case that Danish legislation complies with the requirement for a direct link between absence of a right to deduct and non-taxation. As regards the further requirement, it relies on Bachmann, according to which a Member State’s uncertainty as to whether it can tax payments due from the foreign insurer justifies a conclusion that the tax system is cohesive, provided that in practice it does not charge the tax.

59. The Swedish Government underlines the fact that the Court has never departed from its approach in Bachmann. On the contrary, in particular in Manninen, ( ) it refined that approach specifying that the cohesion of tax legislation only requires tax authorities to permit the deduction of life assurance contributions from taxable income if they can be certain that the capital later paid out by insurance companies on the policy’s maturity will in fact be taxed.

Symmetry of the Danish system

60. In the Commission’s view, the tax advantage which applies to those pension schemes which have been entered into with institutions established in Denmark makes those schemes more attractive. Tax symmetry fails to compensate, however, for the absence of tax advantages in respect of foreign pension schemes. Irrespective of whether a contract was concluded in Denmark or abroad, Denmark can tax all old-age pensions which are paid to insured persons residing on the national territory. Denmark loses that right only if the insured person transfers his residence to another State. Only in that case is it necessary, subject to the existence of DTCs, to preserve the cohesion of the tax legislation. In order to ensure such cohesion, the provisions on the taxation of old-age pensions must be applied in a targeted manner and may not be disproportionate.

61. The Danish Government argues that the Commission has introduced a new argument according to which a Member State may refuse deductibility only if it does not charge any taxes on the payments to be made by the insurer. As regards the argument concerning the transfer of residence of an insured person, the authorities in a Member State do not know at the time when contributions are being made whether the insured person will emigrate and it is also unknown, therefore, whether pursuant to a DTC tax will not be paid in the State in which the contributions were made and in respect of which deductions were granted in the original State of residence, but in the new State of residence. If the Commission’s position on the transfer of residence is to be interpreted as meaning that although a Member State is required to permit the deductibility of contributions paid to foreign pension schemes it is entitled, however, to demand a refund of the deductions if the beneficiary transfers his residence to another Member State, such a position is based on the assumption that the system in question is in conformity with Community law. ( )

Double taxation convention

62. In the Commission’s view the symmetry of the Danish tax system is destroyed by reason of the DTC because cohesion of the tax legislation is no longer established in relation to one and the same individual by a close correlation between deductibility of contributions and taxation of benefits but is shifted to another level, that of the reciprocity of the rules applicable as between the Contracting States. ( ) The judgments in Wielockx and Danner have clarified the principles which were established in Bachmann and Commission v Belgium. It follows, as a result, that the existing cohesion in national tax law between deductibility of contributions and taxation of benefits paid is no longer decisive once DTCs have been entered into since they impact on the cohesion in question. In such a case, Member States can no longer rely on the principle of cohesion of the tax legislation.

63. In the Commission’s view, the tax legislation in question is not cohesive, therefore, because in some of its DTCs Denmark permits certain insured persons a right of deduction and tax exemption. Denmark cannot justify the restrictions on the freedoms by overriding reasons in the public interest since it does not pursue the desired objective in a cohesive and systematic manner.

64. The Danish Government disagrees arguing that regardless of bilateral tax conventions the tax legislation grants non-residents and residents, who are in the same situation, the same right of deduction in respect of contributions paid to Danish pension institutions. If it is to be accepted that the cohesion of the tax legislation can be destroyed by a DTC which diverges from the position in national law, reference must be made to Bachmann and Commission v Belgium. It must be observed that the existence of a DTC which regardless of the deductibility of contributions in Belgium ultimately precludes the taxation of pension payments to recipients not resident in Belgium did not prevent the Court in those judgments from confirming the cohesion of the Belgian tax legislation.

65. The Danish and Swedish Governments take the view that a DTC does not constitute an element of the national tax system. According to the Swedish Government, a DTC permits the elimination of absurd results which may arise from the interaction of several different national tax systems. The scope of the authority to charge tax provided for in national law can never be extended by a DTC, only restricted. It does not constitute the objective of such a convention, therefore, to modify the coherence of national tax systems but merely to resolve conflicts which may arise between two national tax systems. The principle established by Wielockx and confirmed in Danner is that a DTC cannot justify the refusal to deduct contributions paid to an old-age pension scheme. Consequently, cohesion of the tax system at the level of the taxpayer must be realised by an exact correspondence in national law between deductibility of contributions and taxation of the payments to be made by insurers.

2. Appraisal

66. The restriction on several of the fundamental freedoms recorded above ( ) is lawful only if it pursues a legitimate aim which is compatible with the EC Treaty and is justified by overriding reasons in the public interest. In such a case, the application of the restriction, however, must be appropriate to ensure achievement of the aim pursued and may not exceed what is necessary for that purpose. ( )

67. As regards the need to ensure tax cohesion, the parties essentially disagree as to the scope and specific meaning of that concept in providing justification. A further point of disagreement is whether the legislation in question is necessary for ensuring effectiveness of fiscal controls.

68. The Danish Government explained at the hearing that the deductibility or disregard in respect of old-age pension contributions has to be viewed in connection with the taxation of future pension benefits. The legislation at issue constitutes a type of ‘tax loan’ and for that reason the tax authorities must be sure that they will be able to tax future benefits resulting from tax-free contributions, which can be problematic, in particular, if at the time when the person saving for his pension draws his benefits he is no longer resident on the national territory. Against that background, where old-age pension contributions are made abroad, a fact which points to the improbability of being able to tax pension benefits, it is consistent to refuse the tax advantages at issue.

69. From this line of argument, it must be concluded that the subject-matter of the present case ultimately also includes an ‘emigration issue’ and that Denmark’s arguments concerning the effectiveness of fiscal controls are closely connected to those concerning cohesion.

70. It appears appropriate first to address the significance and scope of the principle of cohesion.

a) General observations on the principle of cohesion of the tax system as justification

71. Advocate General Poiares Maduro stressed the importance of cohesion of the tax system in his Opinion in Marks & Spencer ( ) in which he held that ‘[t]he concept of fiscal cohesion performs an important corrective function in Community law. It serves to correct the effects of the extension of the Community freedoms to the tax systems whose organisation is in principle a matter for the sole competence of the Member States. In fact, the application of the freedoms of movement has to be prevented from giving rise to unwarranted interference with the internal logic of national tax regimes. … The function performed by fiscal cohesion is the protection of the integrity of the national tax systems provided that it does not impede the integration of those systems within the context of the internal market.’ ( )

72. The concept of cohesion of the tax system appears, however, to be quite diffuse. Evidently, in elaborating that concept the Court wanted to take account of the fact that – from a national perspective – tax provisions which impose a burden on a taxpayer must be considered together with other provisions which grant him advantages, such as, for example, the connection between taxation of pension benefits and deductibility of contributions. ( ) The purpose of the concept of cohesion is to justify national provisions which pursue the aim of avoiding a double tax burden or ensuring once only taxation, as Advocate General Kokott held in her analysis of the concept in her Opinion in Manninen. ( ) As regards the taxation of pensions, it must be added, however, that in systems in which ongoing returns of pension schemes are taxed, as is evidently also the case in Denmark, regardless of any connection between deductibility of contributions and taxation of benefits, a multiple economic burden cannot be strictly excluded.

73. Finally, in passing, I wish to observe that in the present case the Danish Government has not argued that having regard to the taxation of ongoing returns the legislation in question appears also to be justified because to permit the deductibility of contributions to non-resident institutions would privilege such non-resident institutions, to the extent that returns from contracts in other Member States cannot be taxed.

74. In any event, that is why, in other circumstances going beyond the specific situation of the tax treatment of pensions, the Court has also had to consider the concept of cohesion, in particular, with regard to national corporation tax legislation and was required in that connection to determine, in particular, whether a similar connection between individual tax provisions is to be assumed if, for example, advantages and disadvantages do not coincide within the framework of the same tax ( ) or in respect of the same taxpayer. ( ) Finally, I wish to observe that the not uncontroversial principle of territoriality ( ) is based on similar considerations relating to the economic link between income and deductibility of expenses.

75. Nevertheless, the fact cannot be overlooked that since its sensational judgments in Bachmann ( ) and Commission v Belgium ( ) the Court has no longer permitted justification on grounds of tax cohesion and only in a few cases has it even affirmed the cohesion of the national tax system. ( ) The justification of tax cohesion thus enjoys a curious existence in that in proceedings concerning direct taxation it is almost invariably invoked as justification for any restriction on the fundamental freedoms, at the same time, however, it is hardly ever successful. It is against that background that the literature has speculated about the possibility of the Court departing from its Bachmann approach with some authors criticising the Court’s lack of precision in that approach and others criticising the outcomes in themselves. At the hearing, the Danish Government, however, warned insistently against such a departure and in pointing to the action’s irreconcilability with the outcome in Bachmann and Commission v Belgium it argued that for that reason alone it considered the Commission’s action to be unfounded.

76. This view of the Danish Government is unconvincing solely for the reason that following the judgments in Bachmann and Commission v Belgium the Court has clarified the content of the concept of cohesion of the tax system in such a way that without a doubt the requirements thereby imposed on national provisions have been raised. Already in Wielockx ( ) the Court held that if ‘fiscal cohesion is secured by a bilateral convention concluded with another Member State, that principle may not be invoked to justify the refusal of a deduction’. ( ) That stance was confirmed by the Court in Danner. ( ) As a result, it cannot be claimed that in the present case the Court is faced with the choice between confirming the solution arrived at in Bachmann or dispensing entirely with cohesion as justification.

77. Ultimately, the impression created is that the diffuse nature of cohesion as justification must be attributed to the barely convincing schematic definition of cohesion as a concept. If the difference in treatment of cross-border situations within national tax law were to be analysed as a discrimination issue, ( ) it would be possible to subsume the cohesion argument advanced by national tax authorities more appropriately under the question of whether the difference in treatment at issue is objectively justified. ( )

b) Cohesion at the national level

78. It must be observed at the outset that the Danish Government’s concern, that is, to ensure that where pension contributions enjoyed tax relief the pension benefits are taxed and, particularly so, even if the taxpayer transfers his residence to another Member State, appears as such to constitute a principle worthy of recognition.

79. The Court’s case-law contains numerous indications to that effect: in Bachmann ( ) and Commission v Belgium, ( ) the Court held that cohesion of the tax legislation presupposes that Belgium, ‘in the event of [it] being obliged to allow the deduction of life assurance contributions paid in another Member State, … should be able to tax sums payable by insurers’. The Court confirmed that finding in Manninen, holding that cohesion of the tax system presupposes ‘that, if the Belgian tax authorities were to allow the deductibility of life assurance contributions from taxable income, they had to be certain that the capital paid by the assurance company at the expiry of the contract would in fact subsequently be taxed’. ( )

80. Case-law concerning the taxation of such capital surpluses as are accumulated during a period of residence with unlimited liability to tax ( ) arguably points in the same direction. The Danish Government’s concern was arguably acknowledged indirectly by the Court in X and Y ( ) and de Lasteyrie du Saillant ( ) in that in those cases it held the legislation in question to be incompatible with the relevant fundamental freedom because of its failure to comply with the principle of proportionality.

81. As regards cohesion of the legislation in question at a national level, it must be recalled, however, that the judgments in Bachmann and Commission v Belgium were based on the conclusion that under Belgian national law a direct link existed between deductibility of contributions and taxation of the sums payable by insurers. The Belgian tax system provided for a compensation mechanism between the loss of revenue resulting from deduction of insurance contributions and revenue obtained from the taxation of pensions, annuities and capital sums payable by insurers. Moreover, I would also point out that in the Belgian system the absence of an opportunity to deduct in respect of contributions resulted in an exemption for the benefits.

82. According to the principles of the legislation in question, as summarised in point 14 above, such a direct link between the deductibility of pension contributions and the taxation of benefits paid by pension institutions evidently exists. In the Danish tax system, taxation of benefits paid to Danish residents depends on whether the contributions paid in order to fund such benefits have been deducted from the beneficiary’s taxable income or not.

83. The resulting ‘symmetry’ ( ) – to use the Commission’s term – is inadequate, however, to justify the restriction held to exist because it would have to be determined in that regard whether Denmark could have achieved the aim pursued with less restrictive measures.

84. It must be observed in this connection – regardless of the tax treatment of benefits – that the restriction on the fundamental freedoms held to exist arises out of the inability to deduct contributions or have them exempted and that such an inability to deduct or have exempted does not affect only those taxpayers who transfer their residence to another Member State. In addition, taxpayers who at the time of drawing their benefits have retained their residence in Denmark are affected where there is no possibility of deducting contributions to pension institutions resident abroad even though in their case the taxation of pension benefits is in principle secured. It appears, therefore, that the legislation in question goes beyond its objective pursued and, as a result, is disproportionate.

85. Contrary to the view taken by Denmark, ( ) the Commission in that regard has not introduced a new – and therefore inadmissible – argument. Admittedly, according to the Court’s case-law, the subject-matter of an action under Article 226 EC is defined by the pre-litigation procedure provided for in that article, it does not follow from that, however, that in every case the complaints set out in the letter of formal notice, the wording of the reasoned opinion and the form of order sought in the application must be exactly the same, provided that the subject-matter of the proceedings is neither extended nor amended. ( ) Denmark has not claimed, however, the existence of such an extension or amendment to the subject-matter of the proceedings.

c) Cohesion at the DTC level

86. The inability to tax benefits paid by pension institutions on the taxpayer’s emigration constitutes a consequence of the Danish DTCs which follow the OECD Model Tax Convention in allocating the right to tax pension or other insurance benefits exclusively to the recipient’s State of residence, and, in particular, irrespective of where the paying institution is established. ( ) The allocation of competence in accordance with a DTC is apt, thus, to sever the link in national law between deductibility of contributions and later taxation of pension benefits.

87. Following its judgment in Wielockx, ( ) that fact has been taken into account by the Court and it has held that ‘fiscal cohesion is no longer established in relation to one and the same person by a strict correlation between the deductibility of contributions and the taxation of pensions but is shifted to another level, that of the reciprocity of the rules applicable in the Contracting States’ such that ‘the principle of fiscal cohesion may not be invoked to justify the refusal of a deduction such as that at issue’. ( )

88. It follows from the foregoing that the disadvantageous tax treatment of contributions paid to non-resident pension institutions found to exist may not be justified by the need to ensure tax cohesion.

d) Effectiveness of fiscal controls

89. The effectiveness of fiscal controls as put forward by the Danish Government is unconvincing as a justification, because in similar circumstances, in particular in Danner, ( ) the Court has rejected that justification.

90. A distinction must be made in this regard between controls to ensure that conditions relating to the deductibility of contributions paid to pension schemes with non-resident providers have been met and controls relating to the benefits from such providers.

91. As regards controls to ensure that conditions relating to the deductibility of contributions have been met, the Court held in Danner that ‘there is nothing to prevent the tax authorities concerned from requiring the taxpayer to provide such proof as they may consider necessary in order to determine whether the conditions for deducting contributions provided for in the legislation at issue have been met and, consequently, whether to allow the deduction requested’. ( )

92. Moreover, a Member State may rely upon Directive 77/799 ‘in order to obtain from the competent authorities of another Member State all the information enabling it to ascertain the correct amount of income tax ... or all the information it considers necessary to ascertain the correct amount of income tax payable by a taxpayer according to the legislation which it applies’. ( )

93. As regards taxation of the benefits which have been paid to residents of the relevant Member State – here Denmark – the Court in Danner considered it possible for a Member State to exercise effective control by means of less restrictive measures than denying deductibility of pension contributions. ( ) The Court pointed to Directive 77/799 and to the evidence provided on applying for the deduction. ( )

94. Advocate General Jacobs in his Opinion in the same case put forward the view, moreover, that ‘a Member State can ensure that insurance undertakings established abroad cooperate and provide the necessary information about the payments which they make to residents’. ( ) He suggested, in particular, that arrangements be entered into between foreign pension institutions and the authorities of the Member State concerned, inter alia, in order to communicate information concerning measures taken in performance of the contract. The Court did not adopt that suggestion, arguably for good reason, because it is in many situations impossible to put it into practice, if only because under the law of the State where the pension institution has its seat it may be subject to an obligation of professional secrecy, as the Danish Government, moreover, correctly stressed.

95. It must be concluded, therefore, that the effectiveness of fiscal controls, too, is incapable of constituting justification for the restriction found to exist on the freedom to provide services, the freedom of establishment and the freedom of movement for persons.

VI – Costs

96. Under Article 69(2) of the Rules of Procedure, the unsuccessful party is to be ordered to pay the costs if they have been applied for in the successful party’s pleadings. Under the first subparagraph of Article 69(3) of the Rules of Procedure, where, inter alia, each party succeeds on some and fails on other heads, the Court may apportion costs or order that the parties bear their own costs.

97. In the present case, it must be concluded that in so far as the Commission sought a declaration that the Kingdom of Denmark had infringed Article 56 EC, its action is, in part, unsuccessful.

98. In these circumstances, the Kingdom of Denmark, which did not apply for the Commission to be ordered to pay the costs, must be ordered to pay its own costs and to pay three quarters of the costs of the Commission. The Commission must be ordered to pay one quarter of its own costs.

VII – Conclusion

99. In the light of the foregoing, I propose that the Court declare that:

(1) by introducing and maintaining in force a system for life assurance and pensions under which the right of tax deductions and tax exemptions for contributions (Paragraphs 18 and 19 of the Pensionsbeskatningslov (Law on the taxation of pensions)) is only granted in respect of contributions made under contracts concluded with pension institutions established in Denmark, whereas in respect of contributions made under contracts with pension institutions established in other Member States no such tax relief is granted (Paragraphs 53A and 53B of the Pensionsbeskatningslov), the Kingdom of Denmark has failed to fulfil its obligations under Articles 39 EC, 43 EC and 49 EC;

(2) the remainder of the application is dismissed;

(3) the Kingdom of Denmark shall pay three quarters of the costs of the Commission of the European Communities and its own costs;

(4) the Commission of the European Communities shall pay one quarter of its own costs.