WRITTEN QUESTION E-0068/99

by Esko Seppänen (GUE/NGL) to the Commission

(27 January 1999)

Subject: Double taxation of pensions paid from Sweden to Finland

Together with Esko-Juhani Tennilä, Member of the Finnish Parliament, I have written to the Commission asking it to ascertain whether the Finnish authorities' practice of taxing pensions paid from Sweden violated citizens' freedom of movement within the EU. In addition, I have tabled two written questions on the subject, in reply to which the Commission said that it was looking into the matter and would inform me of its position in autumn 1998. No answer has yet been given. What is the Commission's position on the subject?

Answer given by Mr Monti on behalf of the Commission

(6 April 1999)

The Commission cannot see any incompatibility with Community law of the manner in which Swedish pensions have been taxed in Finland in the past and are taxed today. In general, the fact that taxes differ from one Member State to another is a consequence of the absence of harmonisation of income taxes at Community level. The Commission does not consider these differences to be in conflict with the free movement of people, even if tax burdens can conceivably influence a citizen when deciding in which Member State to live.

As regards the concrete situation of Finnish residents who receive Swedish pensions, these pensions are paid after deduction of 25 % Swedish withholding tax applied to the pension beyond the allowance of SKR 40 000 (± [fmxeuro] 4 500). Under Article 18(1) of the Nordic income and capital tax convention (identical in the 1989 and 1996 versions) such pensions are only taxable in Sweden, thus exempted from tax in Finland. However, by virtue of Article 25(3) (d) of that convention, Finland may include such pension in the Finnish tax base, but shall allow as a deduction from the Finnish tax on income that part of the income tax which is attributable to that pension. In effect, the Finnish rules amount to what is known as "exemption with progression". This corresponds to generally accepted principles of international tax law and in particular to the Organisation for economic cooperation and development (OECD) model tax convention.

Under the previous legislation in force until 1997, Finland applied exactly what is allowed in the tax convention. This led to a result considered unsatisfactory by the pensioners concerned, as the Swedish surplus tax remained at the charge of the pensioner, if the Swedish tax on the pension was higher than the Finnish tax on that part of the income. In order to remedy this situation, section 136(3) of the Finnish income tax act has been modified in favour of the taxpayer in 1997. Now Swedish tax is fully imputed on the overall Finnish tax liability in those cases where so far Swedish surplus tax remained. Thus the combined Swedish and Finnish tax burden can no longer be higher than if the whole income were taxable in Finland only.

Under these circumstances, the Commission does not see any reason to intervene with the Finnish authorities in order to challenge under legal or political grounds their practice or the underlying principles.

However, Finland does not reimburse Swedish tax in the case of pensioners whose Finnish tax liability is lower than the Swedish tax. In such cases Finnish pensioners should benefit in Sweden from the interpretation of the EC Treaty given by the Court of justice in its judgement of 18 February 1995 (C-279/93 - Schumacker) and might need to be treated for tax purposes as if they were residents. In this respect, the Commission has written to the Swedish authorities asking them to explain in which way the principles set out in the Schumacker judgment are respected by the Swedish tax legislation.

Conflicts as to the competence of which Member State is entitled to levy social security contributions are governed by Community law. In the case of health care contributions levied on pensioners benefiting from invalidity or old-age pensions falling under Council Regulation (EC) 118/97 of 2 December 1996 amending and updating Regulation (EEC) 1408/71 on the application of social security schemes to employed persons, to self-employed persons and to members of their families moving within the Community and Regulation (EEC) 574/72 laying down the procedure for implementing Regulation (EEC) 1408/71(1), it is the view of the Commission that such a levy would be contrary to Community law if levied on a pensioner resident in Finland without being the beneficiary of an invalidity or old-age pension under Finnish legislation but the beneficiary of an invalidity or old-age pension under the legislation of another Member State. According to the provisions of the Regulation the Finnish institution would, in such a case, be obliged to provide the health care to the pensioner but on behalf of the institution in the other Member State. However, for pensioners benefiting also from an invalidity or old-age pension under Finnish legislation the provisions of the Regulation do not oppose the levy of social security contributions by Finland, as in such a case benefits would be provided by the Finnish institution at its own expense.

(1) OJ L 28, 30.1.1997.