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: 2001-06-08
Institutions: European Commission
Subjects: EU Member State, EU national, free movement of workers, infringement of EU law, pension scheme, tax system

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Official Journal of the European Communities

8.6.2001

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

(2001/C 165/03)

1. INTRODUCTION

for individual
Pensions are an issue of universal concern:
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 origin (1). This
the Union will
figure is
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.

increasing, and enlargement of

It is estimated that around 25 % of the Union’s active popu-
lation 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 EUR 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 Spain (2).

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 mobility (3).

Furthermore, elimination of tax obstacles to the cross-border
provision of occupational pensions will enable pension insti-
tutions (4) 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

(1) Source: Newcronos database of Eurostat, domain Labour Force

Study.

(2) Figures for 1999. Source: InterSec Research, OECD.
(3) See the Veil Report,

(cid:145)Report of the high-level panel on the free
movement of persons(cid:146), presented to the Commission on 18
March 1997, in particular the report on supplementary pensions,
which led to the creation of the Pensions Forum.

(4) (cid:145)Pension institution(cid:146) is used in this communication in the sense of
(cid:145)institution for occupational retirement provision(cid:146) (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 (cid:145)Pension Fund Directive(cid:146).

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 pensions. Following a proposal by the
the Council adopted on 29 June 1998 a
Commission,
supplementary pensions,
Directive on the safeguarding of
which allows in particular posted workers (5)
to remain in
their home country supplementary pension schemes (6). On
11 May 1999 the Commission issued its communication
(cid:145)Towards a single market for supplementary pensions(cid:146) (7).
In
October 2000 the Commission issued a communication on
safe and sustainable pensions (8) and proposed a Pension
Fund Directive designed to allow cross-border pension
provision and investment while ensuring adequate prudential
supervision (9).

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

(cid:151) seeks a coordinated approach adapted to the diversity of
Member States’ rules rather than attempting to achieve
harmonisation,

(cid:151) calls for the elimination of unduly restrictive or discrimi-

natory tax rules,

(cid:151) presents measures

to safeguard Member

States’

tax

revenues.

(5) Posted workers as defined in Regulation (EEC) No 1408/71 of the
Council: 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, p. 1, as last amended by Council
Regulation (EC) No 1399/1999 of 29 April 1999, OJ L 164,
30.6.1999, p. 1.

(6) 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, p.
46. The Commission’s proposal had included an article on the tax
treatment of pension contributions, but this was not retained by the
Council.

(7) Communication from the Commission (cid:145)Towards a single market for
supplementary
on
results
supplementary pensions in the single market(cid:146), Brussels 11.5.1999,
COM(1999) 134 final.

the Green

pensions,

Paper

of

(8) Communication from the Commission to the Council,

to the
European Parliament and to the Economic and Social Committee
(cid:145)The future evolution of social protection from a long-term point of
view:
sustainable pensions(cid:146), Brussels, 11.10.2000,
COM(2000) 622 final.

safe

and

(9) The proposed Pension Fund Directive, quoted above.

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2. TAXATION OF OCCUPATIONAL PENSIONS IN THE SINGLE

MARKET

much of the discussion in this Communication applies
equally to third pillar pension and life assurance services.

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.

2.2. The taxation of occupational pensions

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

subject

the

are used directly

in which
The first pillar consists of statutory schemes,
entire
participation is generally compulsory for
employed or
resident population. These schemes are
usually financed on a pay-as-you-go basis, where current
contributions
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, Regu-
lation (EEC) No 1408/71 coordinates 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
to the worker’s
contribution and affiliation history in other Member
States.

if necessary,

regard,

employee(s) or

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
respective
employer(s) and the
second pillar
representatives.
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
the scheme. Second pillar
benefits to the members of
pension institutions play a major
role in retirement
provision in a number of Member States (10).

In general, under

their

the

The third pillar consists of
individual schemes, which
generally take the form of contracts taken out by indi-
viduals,
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.

this communication aims at complementing the
As
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

(10) Where this communication uses terms as (cid:145)pension scheme(cid:146) and
in the

(cid:145)retirement benefits(cid:146),
proposed Pension Fund Directive, quoted above.

should be read as

such terms

Contributions

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

vary widely,

as does

schemes

the

Investment returns

invest

the contributions

Pension institutions
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 insti-
tutions. Several Member States, however,
is
often called a (cid:145)yield tax(cid:146) on this income.

levy what

Benefits

Most Member States tax pension benefits, whether paid
periodically or as a lump sum, in the hands of the indi-
vidual 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 insti-
tution, taxed benefits). Three Member States have the ETT
system (exempt contributions,
income
and capital gains of the IORP, taxed benefits), while two
Member States operate a TEE system.

taxed investment

The table below summarises the basic approach of the
different Member States to the taxation of second pillar
pensions (11). 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.

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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

Member States. Lastly, benefits received from pension insti-
tutions established in other Member States may be taxed
more heavily than domestic benefits.

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:

(cid:151) a person who is a scheme member of a pension insti-
tution in a Member State moves to another Member
State and wishes to stay in the same scheme (12),

(cid:151) 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 insti-
tution.

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

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 in Member States’ 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. Point 5 of
this communication
explores ways to deal with the diversity of Member
States’ pension taxation systems.

3. THE IMPACT OF THE FUNDAMENTAL FREEDOMS OF THE

EC TREATY

3.1. Introduction

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
unequal
discrimination
treatment and other restrictions on the free movement
of workers,
free
movement of services and capital.

establishment,

freedom of

nationality,

grounds

and

on

of

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 Safir (13) the Court noted that
the provision of insurance constituted a service within the
meaning of Article 50 (14) of the Treaty and held that
the Treaty precluded the application of
Article 49 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
the Treaty
its objectives to be attained, Article 49 of
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.

tax obstacle

In addition to the problems outlined above, there is at
present a more direct
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

(12) A special group within this category are posted workers. By virtue
of Council Directive 98/49/EC posted workers (as defined in Regu-
lation (EEC) No 1408/71) have the right to remain within their old
scheme in the home State. This Directive is to be fully imple-
mented by Member States by 25 July 2001.

(13) Case C-118/96 Safir [1998] ECR I-1919.
(14) This Communication consistently refers

to the

renumbered

Articles.

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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 Treaty (15).

3.3. Fiscal cohesion

In Bachmann the Court accepted that restricting the deduc-
tibility 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 the earlier case of Bachmann (16) 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 justifi-
cation. 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
involve
supplementary arrangements and expense.

policies would

switching

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 insti-
tutions 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 freedoms (17). In Eurowings the Court held that a
Member State could not impose higher taxation on the
leasing of equipment from another Member State compen-
sating for the lower tax rates imposed on the lessor in that
State (18). Moreover, a Member State cannot justify discrimi-
nation on the ground that its removal will entail a loss of tax
revenue (19). Finally, neither the absence of reciprocity on the
part of other Member States (20) nor the difficulties in
obtaining information constitute valid defences.

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

(15) Case C-118/96 Safir [1998] ECR I-1919, paragraphs 26 to 30.
(16) Case C-204/90 Bachmann [1992] ECR I-249.
(17) Case C-270/83 Avoir fiscal [1986] ECR 273, paragraph 23.
(18) Case C-294/97 Eurowings, [1999] ECR I-7449, paragraph 43.
(19) Case C-264/96 ICI [1998] ECR I-4711, paragraph 28.
(20) Case C-270/83 Avoir fiscal [1986] ECR 273, paragraph 26.

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

in its

received by

is that
residents

conversely, waives

(cid:145)the effect of double taxation conventions which . . .
the State taxes all
follow the OECD model
territory,
pensions
whatever the State in which the contributions were
paid, but,
to tax
pensions received abroad even if
they derive from
contributions paid in its territory which it treated as
therefore been
deductible. Fiscal cohesion has not
established in relation to one and the same person
by a strict correlation between the deductibility of
is
contributions and the taxation of pensions but
the
shifted to another level,
rules applicable in the Contracting States.(cid:146).

that of reciprocity of

right

the

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 issue (21).
In other words, as the Netherlands had surrendered the
to tax pension benefits in their tax treaty with
right
Belgium,
they were not
obliged to grant a deduction where they were unable to
tax the benefits (22).

they could not claim that

(21) Case C-80/94 Wielockx [1995] ECR I-2493, paragraph 25.
(22) 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.

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in Article 18 of

The large majority of Member States’ tax treaties, like the
follow the principle of
treaty concerned in Wielockx,
residence taxation provided for
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. Moreover,
to the
Recovery Directive (23) would
for mutual
assistance for the recovery of tax claims.

the proposed amendment

provide

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
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.

each Member

State’s

3.4. Social policy and prudential supervision

(i.e. approval

Tax approval
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

the purposes of

for

(23) Council 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 Council Directive 77/799/EEC. It is
called (cid:145)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(cid:146), 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.

to the arrangements applicable under first pillar schemes.
For example, the level of tax deductible 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
statutory
schemes taken together with the occupational schemes
provide for a pension no higher than, for instance, 70 %
of final pay.

to ensure that

schemes

so as

it
situations. The

is appropriate to
that
The Commission considers
distinguish between two basic
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
supervision (pending their
as
harmonisation by the proposed Pension Fund Directive),
provided that such conditions are consistent with the
that
Treaty,
they serve legitimate social
in particular
they are not disproportionate in
policy aims and that
the sense that
the freedom to
provide services.

standards of prudential

they unduly restrict

If

to the host State.

The second situation concerns pension schemes already
entered into by migrant workers before coming, often
that State were to
temporarily,
impose its conditions for tax approval this would unduly
restrict the free movement of workers. Migrant workers
would be forced,
from tax
advantages in the host State,
to join a new scheme
meeting the conditions for tax approval (24). 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.

they wished to benefit

if

By contrast, the Commission considers that requirements
of (cid:145)prudential(cid:146) supervision cannot justify (cid:145)fiscal(cid:146) restrictions
on contributions to pension schemes with pension insti-
tutions in other Member States. In Bachmann the Court
held that the need to ensure adequate prudential super-
vision 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

(24) 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.

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removal of prudential barriers

such
States can use other means of ensuring that
requirements are met. The recent proposal for a Pension
Fund Directive puts forward the necessary provisions for
the
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 cooperation between competent auth-
orities (25).

3.5. Fiscal supervision

treatment. For example,

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
in Bachmann the
for different
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 Directive (26) or
indeed could require that the taxpayer provide evidence
himself. The Court has followed similar
reasoning in
Wielockx and other cases (27).

In the Commission’s view such justification is equally inap-
plicable 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. 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
there may be cross-border
even impossible. However,

(25) Prudential barriers for life assurances have already been lifted by
Council Directive 92/96/EEC of 10 November 1992 on the coor-
dination of laws, regulations and administrative provisions relating
to direct life assurance and amending Directives 79/267/EEC and
90/619/EEC (third life assurance Directive), OJ L 360, 9.12.1992,
p. 1.

(26) Council Directive 77/799/EEC of 19 December 1977 concerning
mutual assistance by the competent authorities of the Member
States in the field of direct taxation, OJ L 336, 27.12.1977, p. 15.
(27) 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.

the

and/or

free movement of

situations where national tax rules are contrary to the
for
Treaty provisions on the freedom of movement
workers
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
summarised as follows.

the legal position can be

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: (cid:145)sedentary(cid:146) workers
(that
is workers remaining in one Member State) and
migrant workers. Where citizens resident in a Member
in
State join a foreign scheme the Member State may,
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,
the host State
tax deduction of contributions
cannot refuse to grant
paid to the foreign scheme on the ground that
the
scheme does not meet its conditions for tax approval.

to another Member State,

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
including
bringing the matter before the Court of Justice on the
basis of Article 226 of the EC Treaty.

the EC Treaty,

freedoms of

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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
can take
measures to safeguard their revenues.

in which Member States

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
tax obligations. Such
by their
residents with their
tax by
collection of
exchange would also facilitate
Member States
taxing rights. The
framework for such information exchange already exists
the Mutual Assistance Directive (28)
19
under
December 1977.

exercising source

of

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 exchange information on the
grounds that the information is not required for 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
such information. The Commission
to collection of
concludes
information
system of
exchange could be put in place in the area of pensions
under the Directive.

impediment in national

an adequate

that

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 best means of

The Commission considers that automatic information
exchange is
safeguarding Member
States’ revenues and promoting the interests of a fully
functioning single market in pensions. The Council has
already
automatic
the
information exchange in the area of savings income (29).
that principle to pensions will help
The extension of
level of
same
prevent distortions by ensuring the
information exchange for comparable products.

principle

decided

upon

of

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 (cid:145)Automatic exchange of information(cid:146),
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
if necessary in a
shall be held,
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.

consultations

the Directive imposes certain limits on
Article 8 of
exchange of
In particular, Article 8(1)
information.
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

Details of information exchange

through the
that

Article 9 of the Directive envisages implementation of the
Directive
consultation procedure. This
suggests
in the case of automatic information
take the
exchange Member States would themselves
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
the
and
information to be
frequency of the information exchanges. The Commission’s
preliminary assessment of
the minimum information
which will need to be exchanged is as follows:

information exchange,
and

in particular
format
the

reported

(cid:151) name, address, date and place of birth and, where
the scheme
tax identification number of

available,
member,

(cid:151) name and address of the pension institution,

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

November 2000.

(29) 2312th Council meeting (cid:151) Ecofin (cid:151) Brussels, 26 and 27

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(cid:151) name and address of pension provider where different

5. PAN-EUROPEAN PENSION INSTITUTIONS

from the pension institution (30),

(cid:151) number of the policy,

(cid:151) the date on which the pension entitlement arises or,
where different, the date on which the pension first
comes into payment (31),

(cid:151) total payments made each year by the employee and

employer to the pension institution,

(cid:151) total annual payments made by the pension institution,
or pension provider where different from the pension
institution, and their nature (periodic or lump-sum),

(cid:151) 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 insti-
tution, 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 coordinates its work with
that conducted on savings income, the follow-up to the
report of the Ad-hoc fraud group (32) 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 occupa-
tional pensions in these measures.

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

later

that

at

a

(30) 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.

(31) In some Member States payment of the pension can be deferred

until after actual retirement.

(32) 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.

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 institutions (33). 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
is that Member States would be
able to maintain their own approach to the taxation of
pension arrangements for residents in their own State.

the proposal

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
the State where the member is
and the tax regulations of
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.

tax reasons

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

tax rules. The proposal suggests that

In order to preserve links which may exist between first and
second pillar schemes, arrangements could be made to allow
employees on temporary secondment to 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/EC. 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 (EEC)
No 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
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
that State. Where a pensioner at or after
arrangements of

residence operates an ETT system,

(33) (cid:145)A European institution for occupational

retirement provision
(EIORP) (cid:151) A single licence to enable multinationals to pool
their pension liabilities and assets on a tax neutral basis(cid:146),
European Federation for Retirement Provision, July 2000.

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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 partici-
pating 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.

that

information exchange is

sections over
section of

The advantage of pan-European pension institutions with
different
the
relevant
the pan-European pension institution,
although subject to the supervisory rules of its State of estab-
lishment, would in effect be treated for tax purposes as estab-
lished in the territory of the scheme member and would apply
the same rules and procedures as a domestic pension insti-
tution,
including rules concerning the application of yield
taxes or deduction of tax at source. Member States’ compliance
costs should therefore be lower under pan-European pension
institutions proposal (34). 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
for
example, the provision of information and the collection of
taxes.

the institution in terms of,

the obligations of

to operate

smaller pension institutions

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
the
to expect
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
information exchange
pension provision improvement of
step forward for
would therefore
for pan-European
Member States,
implemented.
pension
Accordingly, both avenues could be exploited at
the same
time. The Commission invites Member States to explore with
for pan-European pension institutions
it how the proposal
could be made operational.

remain an important
the proposal
even if
be

institutions would

broadly

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

(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.

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
taxation of
which provides
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 point 2.3
above.

comparatively

full

for

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 point 2 Member States apply different
pension taxation systems in terms of whether they tax
investment income and capital
or exempt contributions,
gains of
If more
the pension institution, and benefits.
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 system (35). 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.

the second pillar

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
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 funda-
mental choices in the structure of their systems of pension
provision, in particular the relative size of first and second
pillar. As noted in point 3.4, this will generally have an
impact on the total deductible contributions under the
second pillar.

(35) The total adds up to 16, as Germany applies both the EET and the

TEE system.

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to

harmonise Member

The Commission does not therefore envisage proposing
legislative measures
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

Accordingly, it is likely that differences between Member
States’ systems will 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.

for example,

It is also possible to eliminate double taxation arising from
divergent tax rules on pensions by provisions in double
taxation treaties. States could,
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 taxation in State B (36). 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.

In so far as the application by Member States of divergent
tax rules creates 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 mech-
to secure consistent
anisms

to enable the taxpayer

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 appro-
priate Community framework to further their implemen-
tation should be identified. Moreover, a multilateral
convention pursuant to Article 293 of the Treaty or coor-
dinating 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
including bringing the matter
freedoms of
before the Court of Justice on the basis of Article 226 of the
EC Treaty.

the EC Treaty,

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

(cid:151) 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,

(cid:151) examine the proposal for pan-European pension institutions

as reflected in this communication,

(cid:151) consider broader application of the EET principle within

the European Union,

(cid:151) and examine the measures necessary to eliminate unjus-
tified obstacles to the free movement of workers resulting
from the diversity of Member States’ occupational pension
taxation systems, in particular from double taxation.

(36) A provision of this kind can be found in the Canada-United States

taxation treaty.

(37) For example the Netherlands-Portugal Treaty provides an exception
the
to residence taxation where the pension is (cid:145)not
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(cid:146).

taxed at