Tackling tax obstacles to the cross-border provision of occupational pensions
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 Treaty establishing the European Communities and to enhance labour mobility. The Commission therefore proposes a comprehensive strategy to tackle tax obstacles liable to be a disincentive to individuals wishing to contribute to pension schemes outside their home Member State and pension institutions that wish to provide pensions across borders.
Communication from the Commission to the Council, to the European Parliament and to the European Economic and Social Committee, of 19 April 2001, entitled, "The elimination of tax obstacles to the cross-border provision of occupational pensions" [COM(2001) 214 final - Not published in the Official Journal].
Through this communication the Commission:
- seeks a coordinated 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.
To do this, the Commission proposes to monitor Member States' national rules in this field and take the necessary steps to ensure their compliance with the EC Treaty, in particular with the rules on non-discrimination. It reserves the right to initiate legal action against any Member State failing to comply with the rules.
The Commission also proposes adopting measures to maintain the tax revenues of Member States for the cross-border provision of pensions. It further proposes a coordinated approach to eliminating the tax obstacles, in particular double taxation, which result from the different taxation systems for occupational pensions in the Member States.
Application of the EC Treaty rules
The Commission notes that the EC Treaty rules on the free movement of capital, labour and services must be applied in the area of cross-border pension provision. Member States are consequently required to eliminate all discrimination against occupational schemes established in other Member States.
Discrimination means privileged treatment of domestic schemes, in particular more favourable rules on deductibility of contributions or taxation of benefits.
The Commission accordingly intends to examine the compliance of the relevant national rules with the fundamental freedoms of the EC Treaty and, where necessary, to bring cases before the Court of Justice so as to allow the emergence of a fully functioning single market for occupational pensions.
Exchange of information
A Community legislative framework for information exchange already exists, in particular under the Directive on mutual assistance between Member States in the field of direct taxation. In the interests of better coordination between Member States on the collection of taxes applicable to cross-border pensions, the Commission recommends that Member States agree on an automatic exchange of information on occupational pensions.
The Council has already decided upon the principle of automatic information exchange in the area of taxation of savings income. The extension of that principle to pensions will help prevent distortions by ensuring the same level of information exchange for comparable products.
Mismatch of tax systems
Different Member States have different rules in terms of whether they tax or exempt pension contributions, investment income and capital gains of the pension institution, and pension benefits. These differences can create problems where employees spend their working careers in one Member State but retire to another. Pensions are sometimes taxed, for example, even though the contributions are not tax deductible or the pension is not taxed even though the contributions are deductible.
Concerning problems of double taxation and non-taxation arising from the mismatch of tax systems, the Commission recommends wider application of the "EET system" (Exempt contributions, Exempt investment income and capital gains of the pension institution, Taxed benefits) already applied in eleven Member States, entailing the deductibility of pension contributions and investment income coupled with the taxation of benefits, together with better coordination of Member States' taxation rules.
The Commission acknowledges that completely uniform rules for occupational pensions will not be easy to achieve while the reliance on social security and occupational pension schemes varies so significantly from one Member State to another.
The Commission therefore explores how double taxation and double non-taxation problems can be addressed by better coordination of Member States' taxation rules.
Solutions could include unilateral tax relief, bilateral agreements or a multilateral convention or coordinating measures at European Union level.
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. The number of European citizens aged 15 years and over residing in a Member State other than their Member State of origin 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.
At the Stockholm European Council of 23 and 24 March 2001, as part of the new strategy to open up pan-European labour markets, the Commission promised an initiative in the tax field to complement the Directive on occupational retirement provision that would facilitate cross-border pension provision and investment.