Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee - The elimination of tax obstacles to the cross-border provision of occupational pensions
Date: 2001-04-19
Institutions: European Commission
Subjects: European social policy, free movement of workers, pension scheme, social security, transfer of pension rights, wage earner

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 19.4.2001
COM(2001) 214 final

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT AND THE ECONOMIC AND SOCIAL COMMITTEE

The elimination of tax obstacles to the cross-border provision of occupational pensions

TABLE OF CONTENTS

1.

2.

2.1.

2.2.

2.3.

3.

3.1.

3.2.

3.3.

3.4.

3.5.

3.6.

3.7.

4.

4.1.

4.2.

4.3.

5.

6.

6.1.

6.2.

6.3.

7.

Introduction.............................................................................................................. 3

Taxation of occupational pensions in the Single Market ........................................... 5

The three pillars ....................................................................................................... 5

The taxation of occupational pensions...................................................................... 5

Overview of Member States’ systems ........................................................................ 6

The impact of the fundamental freedoms of the EC Treaty ....................................... 7

Introduction.............................................................................................................. 7

The Treaty freedoms ................................................................................................. 8

Fiscal cohesion......................................................................................................... 9

Social policy and prudential supervision ................................................................ 11

Fiscal supervision................................................................................................... 12

Transferability........................................................................................................ 12

Conclusion ............................................................................................................. 13

Safeguarding the application of Member States tax rules ........................................ 14

Introduction............................................................................................................ 14

The Mutual Assistance Directive............................................................................. 14

Request for Committee consultations ...................................................................... 15

Pan-European pension institutions .......................................................................... 16

Dealing with the diversity of Member States’ tax arrangements.............................. 18

Introduction............................................................................................................ 18

Broader acceptation of the EET principle............................................................... 18

Dealing with the co-existence of different systems................................................... 19

Conclusion ............................................................................................................. 20

2

COMMUNICATION FROM THE COMMISSION TO THE COUNCIL, THE
EUROPEAN PARLIAMENT AND THE ECONOMIC AND SOCIAL COMMITTEE

The elimination of tax obstacles to the cross-border provision of occupational pensions

1.

INTRODUCTION

Pensions are an issue of universal concern: for individual citizens who want adequate
provision for their retirement; for employers who seek cost-effective pension
provision for their employees; and for governments, who throughout the Union are
seeking to maintain adequate pension provision in the face of ageing populations.

The potential benefits of better cross-border pension provision are substantial. At
present citizens who take up employment or residence outside their home State are
often unable to remain in their existing occupational pension schemes. Around 5.1
million European citizens aged 15 years and over reside in a Member State other
than their Member State of origin1. This figure is increasing, and enlargement of the
Union will contribute further to this trend. Impediments to cross-border pension
provision may also prevent European businesses from choosing the most efficient
way of providing pensions for their employees by centralising their pension
provision.

It is estimated that around 25% of the Union’s active population is covered by an
occupational pension scheme. The proportion can be higher than 80% in some
€
countries. The value of the assets held by the Union’s pension institutions exceeds
2 000 billion, i.e. it is equivalent to about 25% of the Union’s gross domestic
product. Funded pension assets as a percentage of gross domestic product vary
significantly between Member States, from 95% in the United Kingdom to 5% in
France and 2% in Spain2.

A fully functioning Single Market for occupational pensions is essential to ensure
that citizens are able to exercise their rights to free movement enshrined in the EC
Treaty and thus to enhance labour mobility3.

1

2

3

Source: Newcronos database of Eurostat, domain Labour Force Study.

Figures for 1999, source: InterSec Research, OECD.

See the Veil Report, “Report of the High Level Panel on the free movement of persons”, presented to
the Commission on 18 March 1997, in particular the report on supplementary pensions, which led to the
creation of the Pensions Forum.

3

tax-obstacles

Furthermore, elimination of
to the cross-border provision of
occupational pensions will enable pension institutions4 to operate with greater
efficiency in meeting the needs of workers and employers. It will also make pension
institutions more efficient suppliers of capital
to business in their capacity as
investors in the economy. More generally, it will contribute to European industry’s
competitiveness.

The Commission has accordingly taken a number of initiatives on occupational
the Council adopted on
pensions. Following a proposal by the Commission,
29 June 1998 a Directive on the safeguarding of supplementary pensions, which
allows in particular posted workers5 to remain in their home country supplementary
pension schemes6. On 11 May 1999 the Commission issued its Communication
“Towards a Single Market for Supplementary Pensions”7. In October 2000 the
Commission issued a Communication on safe and sustainable pensions8 and
proposed a Pension Fund Directive designed to allow cross-border pension provision
and investment while ensuring adequate prudential supervision9.

The present Communication supplements the proposed Pension Fund Directive by
dealing with the tax aspects of cross-border occupational pension provision. In
in the Commission Communication of
accordance with the principles set out
11 May 1999 it:

• seeks a co-ordinated approach adapted to the diversity of Member States’ rules

rather than attempting to achieve harmonisation;

• calls for the elimination of unduly restrictive or discriminatory tax rules;

• presents measures to safeguard Member States’ tax revenues.

4

5

6

7

8

9

“Pension institution” is used in this Communication in the sense of “institution for occupational
retirement provision” (IORP), as used in the Proposal for a Directive of the European Parliament and of
the Council on the activities of institutions for occupational retirement provision, Brussels, 11.10.2000,
COM(2000) 507 final, hereafter called the proposed “Pension Fund Directive”.

Posted workers as defined in Regulation 1408/71: See Council Regulation (EC) No 118/97 of
2 December 1996 amending and updating Regulation (EEC) No 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) No 574/72 laying down the procedure for
implementing Regulation (EEC) No 1408/71, OJ L 28, 30.1.1997, pp. 1 – 229, as last amended by
Council Regulation (EC) No 1399/1999 of 29 April 1999, OJ L 164, 30.6.1999, pp. 1-5.

Council Directive 98/49/EC of 29 June 1998 on safeguarding the supplementary pension rights of
employed and self-employed persons moving within the Community, OJ L 209, 25.7.1998, pp. 0046 –
0049. The Commission’s proposal had included an article on the tax treatment of pension contributions,
but this was not retained by the Council.

Communication from the Commission “Towards a Single Market for supplementary pensions, results of
the Green Paper on supplementary pensions
single market, Brussels 11.5.1999,
COM(1999) 134 final.

in the

Communication from the Commission to the Council, to the European Parliament and to the Economic
and Social Committee “The Future Evolution Of Social Protection From A Long-Term Point Of View:
Safe And Sustainable Pensions”, Brussels, 11.10.2000, COM(2000) 622 final.

The proposed Pension Fund Directive, quoted above.

4

2.

TAXATION OF OCCUPATIONAL PENSIONS IN THE SINGLE MARKET

2.1.

The three pillars

There are three main categories of retirement provision in the Member States:
statutory social security schemes (first pillar), occupational schemes (second pillar)
and individual schemes (third pillar). There is no specific Community legislation on
the taxation of retirement provisions.

The first pillar consists of statutory schemes, in which participation is generally
compulsory for the entire employed or resident population. These schemes are
usually financed on a pay-as-you-go basis, where current contributions are used
directly to finance pension payments to retired people. These pension benefits are
guaranteed by the State and the scheme is usually managed by a public body. At the
Community level, Regulation 1408/71 co-ordinates these schemes. Its dual purpose
is to avoid double payment of contributions in respect of workers who move from
one Member State to another and to ensure that benefits are payable across the
European Union to these workers and their survivors by any one Member State
corresponding to the worker’s contribution and affiliation history in that Member
State and having regard, if necessary, to the worker’s contribution and affiliation
history in other Member States.

Second pillar schemes may be set up unilaterally by an employer or as a result of a
collective agreement or a contract agreed individually or collectively between the
employer(s) and the employee(s) or their respective representatives. In general, under
the second pillar employers and/or employees pay contributions to a pension
institution, which invests them. The assets held by the pension institution are used to
pay retirement benefits to the members of the scheme. Second pillar pension
institutions play a major role in retirement provision in a number of Member States10.

The third pillar consists of individual schemes, which generally take the form of
contracts taken out by individuals, in their personal capacity, with life assurance
companies or other financial
institutions, although some Member States have
personal pension schemes to which both employer and employees contribute.

As this Communication aims at complementing the proposed Pension Fund
Directive, its focus is primarily on the second pillar and the pension institutions
covered by that proposal, that is to say, pension institutions which operate on a
funded basis and are outside the first pillar social security systems. Nevertheless it
will be noted that much of the discussion in this Communication applies equally to
third pillar pension and life assurance services.

2.2.

The taxation of occupational pensions

There are basically three levels at which occupational pension provision may be
subject to tax: on the contributions, on the investment returns and on the payment of
benefits.

10

Where this Communication uses terms as “pension scheme” and “retirement benefits”, such terms
should be read as in the proposed Pension Fund Directive, quoted above.

5

Contributions

Nearly all Member States allow some degree of tax deduction of employer's and/or
employee's contributions to pension institutions within their territories, and most do
not treat employer's contributions as taxable income of the employee. However, the
conditions for tax recognition of schemes vary widely, as does the amount of
contributions that are exempted from taxation.

Investment returns

Pension institutions invest the contributions in assets which may generate income
and appreciate in value. Most Member States provide for the exemption of any
income and capital gains in the hands of pension institutions. Several Member States,
however, levy what is often called a “yield tax” on this income.

Benefits

Most Member States tax pension benefits, whether paid periodically or as a lump
sum, in the hands of the individual pensioners. However, tax rates and the extent of
tax-free allowances vary considerably. A number of Member States tax lump sum
payments on more favourable terms or exempt them altogether. Other States do not
allow lump sum payments at all.

2.3.

Overview of Member States’ systems

Thus, the large majority of Member States have what is described as the EET system
(Exempt contributions, Exempt investment income and capital gains of the pension
institution, Taxed benefits). Three Member States have the ETT system (Exempt
contributions, Taxed investment
income and capital gains of the IORP, Taxed
benefits), while two Member States operate a TEE system.

The table below summarises the basic approach of the different Member States to the
taxation of second pillar pensions11. There are important differences between
Member States in the level of deductibility of contributions and the taxation of
benefits. This table provides only a rough overview.

11

Member States may operate more than one system, especially in an international context.

6

Table : Overview of occupational pension taxation systems

EET

ETT

TEE

Belgium

Denmark

Germany

Greece

Spain

France

Italy

Ireland

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

X

In broad terms the table shows that 11 out of 15 Member States have arrangements
providing for tax deduction of pension contributions and for taxation of the benefits,
with exemption at the level of the fund (EET).

Problems may arise from differences
tax treatment of
occupational pension schemes. For example, an employee may spend his working
career in a TEE State but retire to an EET State, in which case he may be subject to
double taxation. Conversely, an employee may work in an EET State and retire to a
TEE State, which may lead to double non-taxation. Chapter 5 of this Communication
explores ways to deal with the diversity of Member States’ pension taxation systems.

in Member States’

3.

THE IMPACT OF THE FUNDAMENTAL FREEDOMS OF THE EC TREATY

3.1.

Introduction

In addition to the problems outlined above, there is at present a more direct tax
obstacle to cross-border pension provision and the free movement of workers. Many
Member States do not extend the tax relief available domestically to contributions
paid to pension institutions established in other Member States. Some impose
conditions on this relief which differ from those applied to domestic schemes. In
some cases a higher yield tax is levied on pension institutions located in other
Member States. Lastly, benefits received from pension institutions established in
other Member States may be taxed more heavily than domestic benefits.

7

The discriminatory treatment of affiliation to foreign pension institutions is a major
obstacle to cross-border pension provision and labour mobility. Two types of
situation should be distinguished:

• A person who is a scheme member of a pension institution in a Member State

moves to another Member State and wishes to stay in the same scheme12.

• An individual employer or group of employers and the representatives of the
employees may wish to make pension arrangements for all employees in different
Member States through a pan-European pension institution.

The Commission considers that the EC Treaty obliges Member States to abolish any
discriminatory rules. This Chapter sets out the Commission’s view of the law on this
matter.

3.2.

The Treaty freedoms

According to Article 14 of the EC Treaty, the internal market shall comprise an area
without internal frontiers in which the free movement of goods, persons, services and
capital is ensured in accordance with the provisions of the Treaty. Articles 39, 43, 49
and 56 of the EC Treaty elaborate these different freedoms. These articles prohibit
discrimination on grounds of nationality, unequal treatment and other restrictions on
the free movement of workers, freedom of establishment, and free movement of
services and capital.

It is clear from the case law of the Court of Justice that those provisions apply in the
areas of pensions and life assurance. For example, in Safir13 the Court noted that the
provision of insurance constituted a service within the meaning of Article 5014 of the
Treaty and held that Article 49 of the Treaty precluded the application of national
legislation which impeded a provider of such services from actually exercising the
freedom to provide them without objective justification. It held further that, in the
perspective of a Single Market and in order to enable its objectives to be attained,
Article 49 of the Treaty likewise precluded the application of national legislation
which had the effect of making the provision of services between Member States
more difficult than the provision of services exclusively within one Member State.

Accordingly, in Safir the Court concluded that a Swedish rule imposing a tax on
persons paying premiums to a life assurance company established in another Member
State, designed to compensate for the yield tax payable by Swedish institutions,
dissuaded individuals from taking out policies with companies not established in
Sweden and created an unjustified obstacle to the freedom to provide services
contrary to Article 49 of the Treaty15.

12

13

14

15

A special group within this category are posted workers. By virtue of Council Directive 98/49 posted
workers (as defined in Regulation 1408/71) have the right to remain within their old scheme in the
home State. This Directive is to be fully implemented by Member States by 25.7.2001.

Case C-118/96 Safir [1998] ECR I-1919.

This Communication consistently refers to the renumbered Articles.

Case C-118/96 Safir [1998] ECR I-1919, paragraphs 26 to 30.

8

In the earlier case of Bachmann16 the Court similarly held that Belgian legislation
which made the deductibility of pension and life assurance contributions conditional
on those contributions being paid to an institution established in that State was in
principle contrary to Article 39 and Article 49 of the Treaty, subject
to any
overriding justification. In addition it held that the legislation impeded the free
movement of workers provided for by Article 39 of the Treaty in so far as it worked
to the particular detriment of migrant workers. The latter would often have concluded
policies before coming to work in Belgium and switching policies would involve
supplementary arrangements and expense.

Given the fundamental freedoms enshrined in the Treaty and their subsequent
interpretation by the Court, it is clear that national restrictions which impede the
provision of pensions and life assurance without objective justification are
incompatible with Community law.

In the Commission’s view there are no grounds justifying unequal treatment of
schemes operated by pension institutions established in other Member States. The
Court has rejected numerous defences put forward by Member States to justify
restrictions of the fundamental freedoms. For example, it is clear that the absence of
harmonisation of Member States’ laws does not prevent the application of the Treaty
freedoms17. In Eurowings the Court held that a Member State could not impose
higher
from another Member State
compensating for the lower tax rates imposed on the lessor in that State18. Moreover,
a Member State cannot justify discrimination on the ground that its removal will
entail a loss of tax revenue19. Finally, neither the absence of reciprocity on the part of
other Member States20 nor the difficulties in obtaining information constitute valid
defences.

taxation on the leasing of equipment

With respect to taxation of pensions and life assurance three issues merit particular
attention.

3.3.

Fiscal cohesion

In Bachmann the Court accepted that restricting the deductibility of contributions
paid to Belgian institutions might be justified by the need to preserve the cohesion of
the Belgian tax system. This was based on the Court’s assumption that there existed
under the Belgian rules a connection between the deductibility of contributions and
the liability to tax on sums payable by the insurers under pension and life assurance
contracts.

In subsequent cases the Court clearly delineated the scope of the fiscal cohesion
principle. In Wielockx the Court held that a Dutch rule which denied a non-resident
self-employed person the right, granted to residents, to deduct from taxable income a

16

17

18

19

20

Case C-204/90 Bachmann [1992] ECR I-249.

Case C-270/83 Avoir fiscal [1986] ECR 273, paragraph 23.

Case C-294/97 Eurowings, [1999] ECR I-7449, paragraph 43.

Case C-264/96 ICI [1998] ECR I-4711, paragraph 28.

Case C-270/83 Avoir fiscal [1986] ECR 273, paragraph 26.

9

provision made to a pension reserve was contrary to Article 43 of the Treaty. The
Dutch Government sought to justify the denial of the deduction by reference to the
principle of
fiscal cohesion laid down in Bachmann. Referring to bilateral
conventions entered into by the Netherlands, the Court dismissed that argument:

“the effect of double taxation conventions which … follow the OECD model is that
the State taxes all pensions received by residents in its territory, whatever the State in
which the contributions were paid, but, conversely, waives the right to tax pensions
received abroad even if they derive from contributions paid in its territory which it
treated as deductible. Fiscal cohesion has not therefore been 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
reciprocity of the rules applicable in the Contracting States”.

The Court concluded that, since fiscal cohesion was secured by a bilateral convention
concluded with another Member State, that principle could not be invoked to justify
the refusal of a deduction such as that in issue21. In other words, as the Netherlands
had surrendered the right to tax pension benefits in their tax treaty with Belgium,
they could not claim that they were not obliged to grant a deduction where they were
unable to tax the benefits22.

The large majority of Member States’ tax treaties, like the treaty concerned in
Wielockx, follow the principle of residence taxation provided for in Article 18 of the
OECD Model Tax Convention. The Court’s reasoning in Wielockx would therefore
apply in such cases. Although a few Member States seek in their treaty negotiations
to introduce source State taxing rights over pension benefits paid to non-residents, in
practice not all of their treaties make such provision, so that taxing rights over
pension benefits are surrendered even though contributions were tax-deductible.
Moreover, even if all of a Member State’s tax treaties were to provide for source
taxation of pension benefits, the refusal of deductibility for contributions paid to
pension institutions established in other Member States would be disproportionate as
there are less restrictive means of ensuring collection of tax at source by a pension
institution established in another Member State. For example, at least one Member
State has adopted the practice of entering into arrangements directly with foreign
pension institutions in order to ensure compliance with its tax rules. In the event of
non-compliance it would be open to the Member State to apply appropriate penalties.

21

22

Case C-80/94 Wielockx [1995] ECR I-2493, paragraph 25.

It may moreover be noted that, since Bachmann, the Court has not upheld broad and general claims of
fiscal cohesion advanced by Member States: see in particular Case C-484/93 Svensson [1998] ECR
I-3955, Case C-107/94 Asscher [1996] ECR I-3089, Case C-264/96 ICI [1998] ECR I-4711, Case
C-294/97 Eurowings [1999] ECR I-7449, Case C-55/98 Vestergaard [1999] ECR I-7643, Case C-
251/98 Baars [2000] ECR I-2787 and Case C-35/98 Verkooijen, not yet reported.

10

Moreover, the proposed amendment to the Recovery Directive23 would provide for
mutual assistance for the recovery of tax claims.

The Commission notes finally that a number of Member States which allow
deduction of contributions to domestic schemes also allow such deduction to foreign
schemes. Such Member States evidently do not consider
that a refusal of
deductibility is necessary to protect their tax revenues. Although each Member
State’s pension taxation system should be assessed in its proper context,
this
confirms the Commission’s view that the refusal of deductions for contributions to
foreign schemes by EET or ETT States is disproportionate.

3.4.

Social policy and prudential supervision

Tax approval (i.e. approval for the purposes of tax deduction of the contributions) of
occupational pension schemes by Member States is subject to certain conditions.
Such conditions may serve policy objectives and be linked to the arrangements
the level of tax deductible
applicable under first pillar schemes. For example,
contributions to occupational schemes is often calculated by reference to first pillar
contributions. Thus, a limit is set for the total annual tax-deductible contributions to
both statutory and occupational schemes so as to ensure that statutory schemes taken
together with the occupational schemes provide for a pension no higher than, for
instance, 70% of final pay.

The Commission considers that it is appropriate to distinguish between two basic
situations. The first concerns pension arrangements newly entered into by a Member
State’s residents or by persons employed within their
territory with pension
institutions established in other Member States. The Commission considers that
Member States are entitled to require that such schemes meet the conditions applied
to similar domestic schemes relating to the nature and level of benefits, the age of
retirement, qualifying beneficiaries and so forth, as well as standards of prudential
supervision (pending their harmonisation by the proposed Pension Fund Directive),
provided that such conditions are consistent with the Treaty, in particular that they
serve legitimate social policy aims and that they are not disproportionate in the sense
that they unduly restrict the freedom to provide services.

The second situation concerns pension schemes already entered into by migrant
workers beforecoming, often temporarily, to the host State. If that State were to
impose its conditions for tax approval this would unduly restrict the free movement
of workers. Migrant workers would be forced, if they wished to benefit from tax
advantages in the host State, to join a new scheme meeting the conditions for tax

23

Directive 76/308/EEC provides for mutual assistance for the recovery of tax claims. At present, this
Directive only applies to agricultural levies, customs duties, VAT and excise duties. On 25 June 1998
the Commission presented a proposal to improve the functioning of the Directive and extend its scope
to direct taxes in order to bring it into line with Directive 77/799/EEC. It is called “Proposal for a
European Parliament and Council Directive amending Council Directive 76/308/EEC on mutual
assistance for the recovery of claims resulting from operations forming part of the system of financing
the European Agricultural Guidance and Guarantee Fund, and of agricultural levies and customs duties
and in respect of value added tax and certain excise duties”, COM(1998) 364 final, of 25.6.1998, OJ
C 269, 28.8.1998, p. 16, as amended by Commission proposal COM(1999) 183 final of 7.5.1999, OJ
C 179, 24.6.1999, p. 6.

11

approval24. Under the equal treatment principle the total tax deduction which the host
State is obliged to grant would nevertheless normally be limited to the deduction
granted in respect of contributions to domestic pension institutions.

By contrast, the Commission considers that requirements of prudential supervision
cannot justify fiscal restrictions on contributions to pension schemes with pension
institutions in other Member States. In Bachmann the Court held that the need to
ensure adequate prudential supervision did not constitute a ground for refusing to
recognise the existence of contracts which a migrant worker concluded with insurers
in another Member State while he was resident
there. More generally, fiscal
restrictions are neither a necessary nor an appropriate means of ensuring that
prudential requirements are met. Member States can use other means of ensuring that
such requirements are met. The recent proposal for a Pension Fund Directive puts
forward the necessary provisions for the removal of prudential barriers to cross-
border management of pension schemes by harmonising certain basic prudential
rules, establishing mutual recognition of national prudential systems and introducing
a system of notification and co-operation between competent authorities25.

3.5.

Fiscal supervision

The Court has shown itself reluctant to accept arguments based on the difficulty of
verifying compliance with tax laws in the case of cross-border situations as a
justification for different treatment. For example, in Bachmann the Court rejected
Belgium’s argument that it was difficult to check certificates relating to the payment
of contributions in other Member States, pointing out that Belgium could have
recourse to the Mutual Assistance Directive26 or indeed could require that
the
taxpayer provide evidence himself. The Court has followed similar reasoning in
Wielockx and other cases27.

In the Commission’s view such justification is equally inapplicable here. However, it
is open to Member States to put in place arrangements to safeguard the application of
their tax laws in the context of cross-border pension provision, in particular by
requiring provision of information by pension institutions.

3.6.

Transferability

A separate issue from the tax obstacles to cross-border participation in pension
schemes are the tax obstacles to the cross-border transferability of pension capital.

24

25

26

27

The position might be otherwise if it were possible for the worker to be transferred to another section of
the pension institution concerned without terminating his policy: see below.

Prudential barriers for life assurances have already been lifted by Council Directive 92/96/EEC of 10
November 1992 on the co-ordination of laws, regulations and administrative provisions relating to
life assurance and amending Directives 79/267/EEC and 90/619/EEC (third life assurance
direct
Directive), OJ L 360, 9.12.1992, pp 0001 – 0027.

Council Directive of 19 December 1977 concerning mutual assistance by the competent authorities of
the Member States in the field of direct taxation (77/799/EEC), OJ 27.12.1977, L 336, p. 15.

Case C-80/94 Wielockx [1995] ECR I-2493 and Case C-250/95 Futura [1997] ECR I-2471. See also
Case C-420/98 W.N. [2000] ECR I-2847, where the Court explains Article 4.1. of the Mutual
Assistance Directive.

12

When a worker moves from an employer in one Member State to an employer in
another Member State, it may be desirable, both for the employee and the pension
institutions that are involved, to transfer the accrued pension capital from the old
pension scheme to the new one. It should be noted that even in cases of mobility
within a Member State transfers of accrued pension capital may be difficult or even
impossible. However, there may be cross-border situations where national tax rules
are contrary to the Treaty provisions on the freedom of movement for workers and/or
the free movement of capital. An example of such a situation could be an EET or
ETT State taxing the value of the pension capital upon cross-border transfer, where it
would not tax a transfer within its territory, and where it applies the principle of
residence taxation of pension benefits in its double tax treaties. The Commission will
examine national tax rules impeding the cross-border transferability of pension
capital and take the necessary steps to ensure effective compliance with the Treaty
rules.

3.7.

Conclusion

The Commission’s view of the legal position can be summarised as follows.

Articles 39, 43, 49 and 56 of the EC Treaty guarantee the free movement of workers,
the freedom of establishment, the freedom to provide services and the free movement
of capital, and they prohibit restrictions to these freedoms. National rules making the
deductibility of pension and life assurance contributions conditional on those
contributions being paid to a pension institution established within national territory
are contrary to those Articles.

Two situations should be distinguished: “sedentary” workers (that
is workers
remaining in one Member State) and migrant workers. Where citizens resident in a
Member State join a foreign scheme the Member State may, in the current state of
Community law, require that the scheme meets conditions for tax approval relating to
the nature and level of benefits, age of retirement, qualifying beneficiaries and
similar proportionate conditions. In the case of citizens who already belong to a
scheme approved for tax purposes in their home State and then move, often
temporarily, to another Member State, the host State cannot refuse to grant tax
deduction of contributions paid to the foreign scheme on the ground that the scheme
does not meet its conditions for tax approval.

Accordingly, the Commission considers that national rules denying equal treatment
to pension schemes operated by pension institutions established in other Member
States are in breach of the Treaty. Member States must ensure that they grant the
same tax deductions for contributions to domestic pension institutions and those
established in other Member States. Equal treatment must similarly be granted in
relation to any yield tax and in relation to the tax treatment of benefits. The
Commission will monitor Member States’ national rules and take the necessary steps
to ensure effective compliance with the fundamental freedoms of the EC Treaty,
including bringing the matter before the Court of Justice on the basis of Article 226
of the EC Treaty.

13

4.

SAFEGUARDING THE APPLICATION OF MEMBER STATES TAX RULES

4.1.

Introduction

This chapter considers how Member States can ensure improved application of their
tax laws in the case of cross-border pension provision. Usually Member States’ tax
laws impose an obligation on domestic pension institutions to inform national tax
authorities of any payment of pension benefits and in some cases to deduct tax at
source. A common concern of Member States is that they might be unable properly
to enforce their tax rules if they allowed their residents to participate in foreign
pension schemes. They fear that their tax authorities would not be informed of the
payment of benefits, that taxpayers might not declare them, and that consequently
cross-border pension provision could lead to unlawful evasion of tax. Accordingly,
this chapter of the Communication examines ways in which Member States can take
measures to safeguard their revenues.

4.2.

The Mutual Assistance Directive

Under nearly all tax treaties between Member States pension benefits are taxable in
the State of residence of the pensioner. Exchange of information on benefits paid by
pension institutions to residents of another Member State would allow Member
States to verify compliance by their residents with their tax obligations. Such
exchange would also facilitate collection of tax by Member States exercising source
taxing rights. The framework for such information exchange already exists under the
Mutual Assistance Directive28 of 19 December 1977.

Under Article 1 (1) of the Mutual Assistance Directive the competent authorities of
the Member States shall exchange any information that may enable them to effect a
correct assessment of taxes on income and on capital. Article 3 of the Directive,
entitled “Automatic exchange of information”, provides that, for categories of cases
which they shall determine under the consultation procedure laid down in Article 9,
the competent authorities of the Member States shall regularly exchange the
information referred to in Article 1 (1) without prior request. Article 9 (1) provides
that consultations shall be held, if necessary in a Committee, between the competent
authorities of all the Member States and the Commission, at the request of one of
those authorities or the Commission, when the matters involved are not solely of
bilateral interest. Since cross-border provision of pensions involves matters which
are of interest to all Member States, a Committee would seem the appropriate forum
for consultations.

Article 8 of the Directive imposes certain limits on exchange of information. In
particular, 8 (1) provides that the Directive shall impose no obligation to have
enquiries carried out or to provide information if the requested Member State would
be prevented by its laws or administrative practices from carrying out these enquiries
or from collecting or using this information for its own purposes.

In the Commission’s view, that provision does not allow a Member State to refuse to
the information is not required for
exchange information on the grounds that

28

Cited above. See also Case C-420/98 W.N. [2000] ECR I-2847.

14

domestic tax purposes. It merely means that a Member State is not obliged to
exchange information which it cannot collect or use even for its own purposes. The
Commission is not aware of any fundamental
laws to
collection of such information. The Commission concludes that an adequate system
of information exchange could be put in place in the area of pensions under the
Directive.

impediment

in national

4.3.

Request for Committee consultations

The Commission will request that consultations are held in the Committee provided
for by Article 9 (1) of the Mutual Assistance Directive to agree the detailed
arrangements for automatic information exchange on occupational pensions. The
Committee should address the following issues:

Automatic information exchange

The Commission considers that automatic information exchange is the best means of
safeguarding Member States’ revenues and promoting the interests of a fully
functioning single market in pensions. The Council has already decided upon the
principle of automatic information exchange in the area of savings income29. The
extension of that principle to pensions will help prevent distortions by ensuring the
same level of information exchange for comparable products.

Details of information exchange

Article 9 of the Directive envisages implementation of the Directive through the
consultation procedure. This suggests that in the case of automatic information
exchange Member States would themselves take the necessary measures for the
collection of the information from market operators to allow such exchange. The
Committee would nevertheless need to agree on the details of information exchange,
in particular the information to be reported and the format and frequency of the
information exchanges. The Commission’s preliminary assessment of the minimum
information which will need to be exchanged is as follows:

• name, address, date and place of birth and, where available, tax identification

number of the scheme member;

• name and address of the pension institution;

• name and address of pension provider where different

institution30;

from the pension

• number of the policy;

29

30

2312th Council meeting – Ecofin – Brussels, 26 and 27 November 2000.

Usually, pensions are paid directly by the scheme or institution. However, they may also be paid as
annuities by regulated providers. While the providers may run schemes they would not be
schemes/institutions themselves.

15

• the date on which the pension entitlement arises or, where different, the date on

which the pension first comes into payment31;

• total payments made each year by the employee and employer to the pension

institution;

• total annual payments made by the pension institution, or pension provider where
different from the pension institution, and their nature (periodic or lump-sum);

• name, address, date and place of birth and, where available, tax identification

number of the beneficiary (if different from the scheme member).

Where the possibility of the transfer of pension capital between pension institutions
of different Member States exists, Member States should also exchange information
on such transfers. Moreover, the elements necessary for calculation of yield tax may
also be useful to certain Member States.

The Committee might wish to consider whether the information should be exchanged
between the Member States, based on information provided by the pension
institution, or whether the information should be exchanged between the pension
institution and the appropriate Member States directly. The latter might be less
onerous on taxation authorities.

The Commission recommends that to ensure technical compatibility the Committee
co-ordinates its work with that conducted on savings income, the follow-up to the
report of the Ad Hoc Fraud group32 and the work on information exchange being
undertaken in the OECD. In this broader framework the Commission will consider
the need for legislative measures, and it will consider the need to incorporate the
exchange of information on occupational pensions in these measures.

The Commission considers that at a later stage consideration could be given to
extending information exchange to third pillar schemes, including life assurance.

5.

PAN-EUROPEAN PENSION INSTITUTIONS

The Commission also wishes to bring to the attention of the Council, the European
Parliament and the Economic and Social Committee a proposal made by industry for
pan-European pension institutions33. This proposal is designed to enable employees
of a multinational company to belong to the same pension institution wherever they
are employed. The basic principle of the proposal is that Member States would be
able to maintain their own approach to the taxation of pension arrangements for
residents in their own State.

31

32

33

In some Member States payment of the pension can be deferred until after actual retirement.

The Ad hoc Working Party on Tax Fraud is a Council working group, dealing with tax fraud in both the
indirect and the direct tax areas.

“A European Institution for Occupational Retirement Provision (EIORP) - A Single License to enable
Multi-Nationals to pool their pension liabilities and assets on a tax neutral basis”, European Federation
for Retirement Provision, July 2000.

16

In practical terms a pan-European pension institution located in one Member State
would have different sections, each section complying with the requirements for tax
approval and the tax regulations of the State where the member is employed, and its
social law. If in the course of his career with the multinational a person were to
change his Member State of employment, he would continue to pay contributions to
the same pan-European pension institution, but to a different section.

The transfer of accrued benefits between the different sections would not be
necessary. After retirement the worker would receive benefits from each national
section in accordance with the rights acquired under the national rules applicable to
these sections.

In the case of a pan-European pension institution it might be necessary for tax
reasons to determine which assets are allocated to each national section and are thus
subject to the different national tax rules. The proposal suggests that the assets
should be divided between each section in accordance with the corresponding
liabilities at the last actuarial valuation, and taxed accordingly.

In order to preserve links which may exist between first and second pillar schemes,
to
arrangements could be made to allow employees on temporary secondment
another Member State not to be transferred immediately to the section for that State.
Instead they could remain for a certain period within the section for their Member
State of origin, as envisaged by Directive 98/49. That period could be determined by
reference to the period for which such employees remain subject to that State’s
legislation in terms of Regulation 1408/71.

In addition, pan-European pension institutions would comply with the rules on
payment and collection of tax applicable in the State of work or residence. For
example, if the Member State of work or residence operates an ETT system, the pan-
European pension institution would pay the yield tax levied on the fund to the
authorities of that State and, where applicable, would also collect tax at source on the
benefits and provide information to that State in accordance with the arrangements of
that State. Where a pensioner at or after retirement takes up residence in a Member
State other than that of his employment, he would be transferred to the section for
that Member State (if one existed).

The proposal for pan-European pension institutions was developed with a single
employer and a small group of participating States in mind. However, there seems no
reason in principle why it could not provide the basis for more general arrangements
for cross-border pension provision within the EU, covering several companies or
entire sectors or professions. There would of course be a number of detailed
technical issues to be considered.

The advantage of pan-European pension institutions with different sections over
information exchange is that
the relevant section of the pan-European pension
institution, although subject to the supervisory rules of its State of establishment,
would in effect be treated for tax purposes as established in the territory of the
scheme member and would apply the same rules and procedures as a domestic
including rules concerning the application of yield taxes or
pension institution,

17

deduction of tax at source. Member States’ compliance costs should therefore be
lower under pan-European pension institutions proposal34. A further advantage of the
proposal is that it might be possible to implement it without new tax legislation. To
this end a Member State could conclude an agreement with a pan-European pension
institution setting out the obligations of the institution in terms of, for example, the
provision of information and the collection of taxes.

It should be noted that the proposal for pan-European pension institutions and the
proposed improvement of information exchange are not mutually exclusive. It may
be unreasonable to expect smaller pension institutions to operate the pan-European
pension institution arrangements given the need to apply the tax laws of different
Member States. In the case of smaller pension institutions involved in cross-border
pension provision improvement of information exchange would therefore remain an
important step forward for Member States, even if the proposal for pan-European
pension institutions would be broadly implemented. Accordingly, both avenues could
be exploited at the same time. The Commission invites Member States to explore
with it how the proposal for pan-European pension institutions could be made
operational.

6.

DEALING WITH THE DIVERSITY OF MEMBER STATES’ TAX ARRANGEMENTS

6.1.

Introduction

The differences between the national rules for deductibility of contributions and
taxation of benefits may lead to double taxation for migrant workers or persons
retiring to another Member State. For example, an employee may work in a Member
State which gives only limited relief for pension contributions but retire to a Member
State which provides for comparatively full taxation of benefits. Conversely, such
differences can also lead to non-taxation. For example, another employee may work
in a Member State giving generous relief for contributions and then retire to a
Member State which has generous tax arrangements for pension benefits, as noted in
chapter 2.3. above.

It should be noted that double taxation is in particular a problem for cross-border
labour mobility and retirement. It does not arise from the location of a pension
institution in another Member State but from the differences in national tax rules and
from the treaty practice of Member States, which mostly follows the OECD Model
Tax Convention under which a pensioner is taxable in his country of residence (i.e.
retirement) regardless of whether and where his contributions were deducted. Double
taxation is an issue wherever the fund is located.

6.2.

Broader acceptation of the EET principle

As indicated in Chapter 2 Member States apply different pension taxation systems in
terms of whether they tax or exempt contributions, investment income and capital

34

In order to prevent double taxation and a restriction of pan-European pension institutions’ freedom to
provide services, it would be necessary for Member States to ensure that the relevant sections of pan-
European pension institutions were exempted from any yield taxes levied by the Member States where
they were located.

18

gains of the pension institution, and benefits. If more Member States were to apply
the same system this would help to reduce the double taxation and non-taxation
arising from the divergence in their systems.

Eleven Member States have an EET system, three have an ETT system, and two
have a TEE system35. This means that in practical terms it is probably easiest to
strive for alignment of Member States’ pension taxation systems on the basis of the
EET principle. Moreover, by providing for a tax deferral on the contributions paid,
the EET system encourages the making of retirement provision. The EET system
also helps to cope with demographic ageing as it reduces tax revenues today in
exchange for higher tax revenues at the time when the demographic dependency ratio
will be much more unfavourable.

It should however be emphasised that acceptation of the EET principle by all
Member States would not provide a complete solution. Even among EET States there
are significant differences under the second pillar in the levels of deductibility of
contributions. Such differences reflect not merely the individual preferences of
Member States in the design of their tax rules but also more fundamental choices in
the structure of their systems of pension provision, in particular the relative size of
first and second pillar. As noted in Paragraph 3.4., this will generally have an impact
on the total deductible contributions under the second pillar.

The Commission does not therefore envisage proposing legislative measures to
harmonise Member States’ pension taxation systems. Nevertheless, as alignment of
Member States’ systems according to the EET principle would help to reduce the
mismatches which lead both to double taxation non-taxation, the Commission would
welcome its broader acceptation.

6.3.

Dealing with the co-existence of different systems

it

is likely that differences between Member States’ systems will
Accordingly,
remain for the foreseeable future. It is therefore useful to explore practical measures
to deal with the co-existence of different systems which can be put in practice in the
short term.

If a citizen earns his pension in a TEE State and receives it in an EET State his
pension may be subject to double taxation. He is granted no or only limited tax
deduction of his contributions while his benefits are taxed. Some Member States
have unilaterally introduced provisions to eliminate the double taxation arising in
such cases, notably by exempting benefits paid by foreign pension institutions to
their residents to the extent that the contributions were not deductible. For example,
Denmark and Sweden have provisions of this kind.

It is also possible to eliminate double taxation arising from divergent tax rules on
pensions by provisions in double taxation treaties. States could, for example, include
a provision stating that pensions arising in State A and paid to a resident of State B
may be taxed in State B, but the amount of the pension that would be excluded from
taxation in State A if the recipient were a resident of State A shall be exempt from

35

The total adds up to 16, as Germany applies both the EET and the TEE system.

19

taxation in State B36. The effect of such a provision would be that if a worker retired
from a TEE State to an EET State the EET State would not tax his pension, as his
pension would have been exempt in his State of origin.

tax rules creates
In so far as the application by Member States of divergent
unjustified obstacles to the fundamental Treaty freedoms discussed above, those
obstacles must be eliminated. Measures for their elimination could include unilateral
relief or bilateral solutions. The functioning of bilateral solutions could be enhanced
by the introduction of rules to resolve conflicts of interpretation and mechanisms to
enable the taxpayer to secure consistent treatment by both authorities concerned. The
Commission would be prepared to assist Member States in undertaking a detailed
study of existing provisions that could find broader application. Subsequently to this
study the appropriate Community framework to further their implementation should
be identified. Moreover, a multilateral convention pursuant to Article 293 of the
Treaty or co-ordinating measures at Community level could be envisaged.

The differences between national rules can also lead to non-taxation of benefits,
notably where a citizen earns his pension in an EET State and collects his benefits in
a TEE State. In the absence of more uniform rules some Member States, although in
principle favouring residence taxation, have sought to resolve this issue by providing
in some treaties for source taxation in circumstances where there would be
abnormally low taxation in the State of residence.37

7.

CONCLUSION

The Commission considers that discriminatory tax treatment of pension and life
assurance policies concluded with pension institutions established in other Member
States is contrary to the fundamental freedoms of the EC Treaty. The Commission
shall monitor the relevant national rules and take the necessary steps to ensure
effective compliance with the fundamental freedoms of the EC Treaty, including
bringing the matter before the Court of Justice on the basis of Article 226 of the EC
Treaty.

The Commission invites the Council, the European Parliament and the Economic and
Social Committee to:

• examine the proposals made in this Communication on the exchange of
information with a view to safeguarding the proper application of Member States’
tax rules;

• examine the proposal for pan-European pension institutions as reflected in this

Communication;

• consider broader application of the EET principle within the European Union;

36

37

A provision of this kind can be found in the Canada-United States taxation treaty.

For example the Netherlands-Portugal treaty provides an exception to residence taxation where the
pension is “not taxed at the generally applicable rate for income derived from dependent personal
services, or less than 90% of the gross amount of the pension or similar remuneration … is taxed”.

20

• and examine the measures necessary to eliminate unjustified obstacles to the free
movement of workers resulting from the diversity of Member States’ occupational
pension taxation systems, in particular from double taxation.

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