Opinion of the Economic and Social Committee on the "Communication from the Commission to the Council, the European Parliament and the Economic and Social Committee on the elimination of tax obstacles to the cross-border provision of occupational"
Date: 2001-10-17
Institutions: European Economic and Social Committee
Subjects: European Union, free movement of workers, pension scheme, supplementary pension, tax, tax harmonisation

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Official Journal of the European Communities

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annual objectives ‘in all the segments’. Although this might be
an important step, it could adversely affect compliant fleets.

2.3.6.
Point (6), which amends Article 16(2), should explain
more clearly why a Council Decision is to be replaced by
‘Community legislation’.

Brussels, 17 October 2001.

The President

of the Economic and Social Committee

Göke FRERICHS

Opinion of the Economic and Social Committee on the ‘Communication from the Commission
to the Council, the European Parliament and the Economic and Social Committee on the
elimination of tax obstacles to the cross-border provision of occupational’

(2002/C 36/12)

On 19 April 2001 the Commission decided to consult the Economic and Social Committee, under
Article 262 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for Economic and Monetary Union and Economic and Social Cohesion, which was
responsible for preparing the Committee’s work on the subject, adopted its opinion on 24 September
2001. The rapporteur was Mr Byrne.

At its 385th plenary session of 17 and 18 October 2001 (meeting of 17 October 2001), the Economic
and Social Committee adopted the following opinion by 88 votes to one with two abstentions.

1.

Introduction

The Commission published its proposals for a draft
1.1.
directive on the activities of
institutions for occupational
retirement provision in October 2000 (1). The Committee
adopted its opinion on the proposed directive in March
2001 (2).

This communication deals with the tax aspects of
1.2.
cross-border occupational pension provision which are not
covered in the draft directive.

2. Background

2.1.
Pensions are of universal concern but particularly to
individual EU citizens who want adequate provision for their
retirement. Pensions in the Community are provided under
three pillars:

(1) COM(2000) 507 final.
(2) OJ C 155 , 29.5.2001, p. 26.

— Pillar 1: Social security schemes set up on a statutory
basis whether managed by the State, the contributors or
otherwise (generally pay as you go).

— Pillar 2: Occupational (funded) schemes (generally tied to

the employer).

— Pillar 3: Individual schemes (generally with life-assurance

companies).

2.2.
The proposed pensions directive and this communi-
cation are both focused on the matters which need to be dealt
with in relation to the cross-border provision of Pillar 2
schemes although the proposals particularly in relation to tax
would also be generally relevant to Pillar 3 arrangements as
well.

The reason the directive did not deal with the taxation
2.3.
taxation must be decided by unanimity.
aspects is that
Including tax in the directive is likely to have delayed or
aborted its adoption.

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2.4.

The present communication:

— 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 discrimi-

natory tax rules;

— presents measures to safeguard Member States’ tax rev-

enues.

3. The taxation of occupational pensions in Member

States

3.1.
Occupational pension arrangements may be subject to
tax at three stages — on the contributions to the fund, on the
investment returns earned by the fund and on the pensions
paid out to beneficiaries.

3.1.1.
The majority of Member States allow some tax relief
on employee’s contributions and most do not treat employer’s
contributions as taxable income of the employee. Thus contri-
butions are most commonly exempt.

3.1.2. Most Member States do not tax the returns earned
on the investment of pension funds but some Member States
do levy a ‘yield tax’. Investment income is therefore most
commonly exempt.

3.1.5.
A consequence of these arrangements is that it is
technically possible that an individual moving to another
Member State on retirement might in effect suffer double
taxation or no taxation at all.

4. The Commission’s approach to the taxation issue

4.1.
As has been noted already any attempt at this stage to
harmonise tax rules would cause problems for Member States
and would be most unlikely to achieve unanimity.

4.2.
The Commission therefore concentrates on dealing
with discriminatory treatment of cross-border pension pro-
vision. Two particular problems are identified:

— A person who is a member of a pension scheme in a
Member State moves to another Member State and wishes
to stay in the existing scheme.

— 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.

3.1.3. Most Member States tax pension benefits although a
number of Member States either tax lump sum payments less
heavily or do not charge any tax at all (up to a certain limit).
Pensions are therefore most commonly taxed.

4.3.
The Commission considers that the EC Treaty obliges
Member States to abolish any discriminatory rules under
Article 14 and the Commission quotes a number of decisions
of the European Court of Justice in support of this including
Safir (1998) and Wielockx (1995).

The table attached as Appendix 1 summarises the
3.1.4.
basic approach of Member States to the taxation of second
pillar pensions. There are important differences between them
in the level of deductibility of contributions and the taxation
of benefits. It is important to note that this table therefore
provides only a rough guide.

3.1.4.1.
The table shows that in broad terms 11 Member
States have arrangements providing for exemption of pension
contributions, exemption of investment income received by
the fund and taxation of pension benefits (EET). Three Member
States exempt pension contributions, tax investment income
and tax pensions (ETT) and two Members States tax contri-
butions, exempt investment income and exempt pensions
from tax (TEE).

4.4.
The Commission’s overall view is that Member States
are entitled to require all newly entered pension arrangements
by persons resident in that State to conform to the appropriate
domestic law. However for a migrant worker who is already a
member of a pension scheme outside the State such a rule
would unreasonably restrict the free movement of workers.

4.5.
Therefore when an EU citizen already belongs to a tax-
approved scheme in his own Member State and then moves,
tax deduction of
the host State cannot refuse to grant
contributions paid to the non-resident scheme, if such tax
relief is available to members of resident schemes.

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4.6. Where a worker moves to another Member State he
may not wish to remain in his home-country scheme — but
may prefer to join a scheme in the host country. In this event
he may wish to transfer his pension capital from the home-
country scheme to the host country scheme. The Commission
accepts that such transfers may present difficulties but argues
that no tax should be charged if it would not be charged on a
similar transfer within the Member State.

The Commissions conclusions in summary are that

4.7.
Articles 39, 43, 49 and 56 guarantee the:

— free movement of workers;

— freedom of establishment;

— freedom to provide services; and

— free movement of capital.

It should be noted however that the possibility of a
4.8.
migrant worker remaining in his home-country scheme would
in most Member States be subject to the consent of the
employer sponsoring the home-country scheme.

5. Safeguarding the application of Member States’ tax

rules

5.1.
The Commission argues that the use of the Mutual
Assistance Directive provides a sufficient mechanism to protect
Member States’ tax revenues. The Commission considers that
the automatic exchange of information, similar to that already
proposed in the area of savings income, is the best way of
achieving this.

6. Pan-European pension institutions

6.3.
An employee moving from one Member State to
another would continue paying contributions to the same
institution but to a different section. The institution would
operate each section in accordance with the tax and other
rules of the relevant Member State.

7. Dealing with the diversity of Member States’ tax

arrangements

7.1. While promoting the adoption of the EET rule as it
already enjoys the widest level of support, (indeed it can be
noted that Germany although a TEE country for funded
pension schemes has proposed the introduction of a new tax
advantaged personal pension plan as part of its proposed
reforms of its social security system) the Commission recog-
nises the immediate need for a solution to the cross-border tax
issue which in theory could lead to double taxation or to no
taxation for a pension recipient (see paragraph 3 above).

The Commission suggests that appropriate bilateral
7.2.
Double Taxation agreements should be put in place, which
they believe would solve this problem. For example the
agreement could provide that a pension from State A received
by a person resident in State B would only be taxed on the
same amount of pension as would have been liable to tax in
State A.

8. General comments

8.1.
The Committee believes that it is essential to deal with
the tax problems involved in the cross-border provision of
occupational pensions as a matter of urgency. Basic Treaty
freedoms are involved — workers are impeded in exercising
their right of free movement to work, service institutions are
unable to operate across borders and major companies suffer
avoidable additional cost through the fragmentation of their
pension arrangements.

6.1.
The Commission puts forward for consideration a
proposal made by industry for Pan-European pension insti-
is designed to make it possible for
tutions. The proposal
employees of a multinational company to belong to a single
pension institution based in one Member State regardless of
the Member State in which they are employed.

8.2.
The Committee stresses that any discussion of pensions
must ultimately ensure fair fiscal treatment as between all three
Pillars. The Committee also points out that although Pillar 2
schemes are the focus of this communication the content
applies in large measure to Pillar 3 schemes as well.

6.2.
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. This would be achieved by having within the pension
institution separate sections for employees in each Member
State.

The Committee has defined its preferred solution as
8.3.
the adoption of an appropriate directive (1) to regulate this
area. The Committee acknowledges however the practical

(1) OJ C 155, 29.5.2001, p. 26.

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difficulty facing this solution. The Committee therefore wel-
comes this Communication from the Commission and praises
the Commission for its determination to find a way of ensuring
Treaty freedoms are honoured.

8.7. While expressing its support for the Commission’s
efforts to find a way of dealing with the diversity of Member
States tax systems it notes that the Commission has not dealt
in great depth with this complex area. For example the issue
of the ETT countries does not seem to be adequately addressed.

The Committee also notes the important role played
8.4.
by the European Court of Justice in upholding the Treaty and
the extent to which case law is already shaping the way
forward.

8.5.
The Committee believes that the Commission has
made a major effort to make progress in this area while still
trying to reduce problems believed to exist by Member States
administrations. The Committee hopes that this proportionate
approach by the Commission will enable rapid progress to be
made.

8.6.
The Committee has previously expressed its support
for the EET system of taxing pensions (1). The Committee
believes the EET system is preferable because:

(a)

it is inherently more equitable since it imposes tax on the
actual benefit received and not on the contributions
which will produce different benefit outcomes for differ-
ent members depending for example on how long they
live;

(b) by providing tax relief on contributions it encourages the

making of retirement provision; and

(c)

it helps to deal with the demographic problem since it
reduces tax revenues today in exchange for tax revenues
at the time when the demographic dependency ratio will
be much more unfavourable.

8.6.1.
The Committee recognises however that, due to the
diversity of Member States’ tax systems, it is difficult to predict
when the adoption of EET as an EU-wide system might be
achievable. The Committee notes however that a change by
ETT countries to the EET system would be relatively straight
forward from a technical standpoint although the impact on
Member States tax revenue would have to be addressed.

8.6.2.
The Committee recommends to the Commission
that the Applicant Countries be encouraged to adopt the EET
system to reduce further diversity in an enlarged community.

(1) OJ C 368, 20.12.1999, p. 57.

8.7.1.
If a worker from an EET country moves to an ETT
country and elects to stay in his existing scheme how does the
host country collect the tax on the investment returns which
it would apply to one of its own citizens.

8.7.2.
If a worker moves from a TEE country to an EET
country but subsequently returns to his original home state
and eventually retires there having remained throughout in his
original pension scheme will the TEE state tax that portion of
the pension attributable to the period in the EET country. If
not the worker benefits by getting tax relief on both contri-
butions and pension. Obviously the converse could arise.

8.7.3.
The Committee welcomes therefore the intention of
the Commission as stated in the Communication to work
with Member States to develop rules to resolve conflicts of
interpretation and mechanisms to enable tax payers to secure
consistent treatment by both authorities concerned. Although
much of the debate will take place on a bilateral basis the
Committee hopes that the Commission’s involvement will lead
to the adoption of commonly applied solutions as far as
possible.

8.8.
The Committee welcomes the fact that the concept of
pan-European pension institutions is now being actively
considered.

The proposal does not adversely affect Member
8.8.1.
State interests as each national section in the pan-European
institution would be administered in accordance with the tax
rules and labour law of that Member State.

8.8.2. While the Committee does not recommend the use
of fiscal representatives it suggests that Member States’ tax
authorities might be reassured if provision was made for the
nomination by the multinational sponsor of the pension
institution of a designated local company official who was
resident in that Member State. This official e.g. the local
Pension Administrator would be responsible to the local tax
authorities for the collection of tax due in respect of locally
based members of the non-resident scheme.

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8.8.3.
The Committee believes however that careful con-
sideration will need to be given to all the consequences of this
proposal particularly with regard to the agreements concluded
between the social partners in some Member States requiring
affiliation to existing occupational schemes. This obligation
has been upheld by recent judgements of the European Court
of Justice. The Committee suggests that discussion between
the social partners could assist in reaching a solution which,
whilst meeting the need for worker mobility and for guarantees
of pension rights, would also take account of these agreements.

The Committee also observes that it is commonly
8.8.4.
supposed that only the largest companies will be able to avail
of these arrangements. The Committee hopes that this will not
be so and expects that Pension-service providers will, when
the initial teething problems have been eliminated, be able to
offer such arrangements to at least medium-sized companies
at a reasonable cost. It should also be possible for groups of
companies to amalgamate informally to enable them to avail
of these arrangements.

8.8.5.
The Committee is pleased to learn that a pilot scheme
is planned involving a limited number of Member States,
which will provide the opportunity to validate this type of
arrangement from everyone’s point of view — Member States,
Employers and Employees’ representatives.

8.8.6.
The Committee nonetheless notes that sufficient
details are not yet available to enable it to undertake a full
evaluation of the proposal and would welcome the opportunity
to review the proposal further when these are available.

8.9.
In discussing pensions the Committee stresses that it
should not be forgotten that in some Member States special
provisions apply whereby the tax burden on occupational
pensions paid to persons suffering from either physical or
mental disability are subject to favourable tax treatment. The

Brussels, 17 October 2001.

Committee believes the needs of this category of citizens
should always be the focus of special consideration.

9. Conclusions

9.1.
The Committee welcomes the action of the Com-
mission in bringing forward these proposals designed to
eliminate tax obstacles to the cross-border provision of
occupational pensions.

The Committee supports the Commission’s approach,
9.2.
which is to monitor the relevant national rules and take the
necessary steps to ensure effective compliance by Member
States with the fundamental freedoms of the EC Treaty.

The Committee agrees that the Mutual Assistance
9.3.
Directive is the appropriate basis on which to develop the
exchange of information necessary to safeguard the proper
application of Member States’ tax rules.

9.4.
The Committee welcomes the outline proposal for the
establishment of pan-European pension institutions although
the Committee recognises that more detailed work and
consultation will be required to ensure effective implemen-
tation.

9.5.
The Committee agrees that the long-term aim should
be to adopt the EET system of taxation of pensions as the
standard system for the EU. This should be indicated in
advance to the Applicant Countries.

9.6
.The Committee supports the objective of removing
unjustified obstacles to the free movement of workers. The
Committee therefore also supports the principles outlined in
the Commission document but believes that it will be necessary
for the Commission to work closely with individual Member
States to develop solutions to the complex issues involved.

The President

of the Economic and Social Committee

Göke FRERICHS

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APPENDIX

to the opinion of the Economic and Social Committee

The table below summarises the basic approach of the different Member States to the taxation of second pillar
pensions (1). 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.

Table: Overview of occupational pension taxation systems

Belgium

Denmark

Germany

Greece

Spain

France

Italy

Ireland

Luxembourg

Netherlands

Austria

Portugal

Finland

Sweden

United Kingdom

EET

X

X

X

X

X

X

X

X

X

X

X

TEE

X

X

ETT

X

X

X

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