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Brussels, 20 December 2004

Pension taxation: Commission requests Sweden to end discrimination against foreign pension funds

The European Commission has decided to send a formal request to Sweden to amend its discriminatory pension tax legislation. The main problem is that, under Swedish law, pension contributions that an employer makes on behalf of his employees to foreign pension funds are not tax deductible while contributions paid to domestic funds are. The request is in the form of a reasoned opinion, the second stage of the infringement procedure under Article 226 of the EC Treaty. This action demonstrates the new Commission's commitment to continue the work commenced by the previous Commission on the elimination of tax obstacles to the cross-border provision of occupational pensions (see IP/01/575 and MEMO/01/142).

"The European Commission is determined to tackle tax discrimination against occupational pension funds of other Member States" said Taxation and Customs Commissioner László Kovács. "The Court of Justice has in its judgement in the Skandia case provided very clear guidance on pension taxation and Sweden must bring its law into line with that judgement without delay".

Swedish employers wishing to arrange occupational or supplementary pension schemes for their employees with insurers established outside Sweden rather than purchasing such policies from Swedish insurers suffer, in particular, from the following disadvantages:

  • Non-deductibility of the insurance premiums. Although an employer would have the right to claim a tax deduction in respect of the amounts of pension benefits eventually paid to his employees on retirement, the non-deductibility of the premiums represents a significant cash flow disadvantage;
  • Higher rate of yield tax. Any increase of the capital invested in foreign policies is taxed at a higher rate than the increase of capital invested in Swedish policies (27% instead of 15%);
  • More burdensome compliance requirements. Unlike a holder of a Swedish policy, the holder of a foreign policy must register his policy with the Swedish tax authorities and is personally liable to pay the yield tax on any increase of capital.

The legislation clearly makes it less attractive for insurers established elsewhere within the EU or the European Economic Area (EEA) to sell insurance policies in Sweden and dissuades employers from subscribing to foreign insurance policies. The Commission therefore considers that the Swedish legislation constitutes an obstacle to the freedom to provide services and the free movement of capital guaranteed by the EC Treaty and the EEA Agreement.

The Swedish government in October 2004 published a proposal to amend its rules by reducing the yield tax rate from 27% to 15% for policies taken out with insurers established within EEA.

However, the rate reduction would only apply to such policies that have been purchased after the entry into force of the proposed changes. Furthermore, the proposal does not envisage any changes to the existing rules concerning the deductibility of premiums paid to foreign insurers, an aspect of the Swedish legislation that the European Court of Justice found to be incompatible with the Treaty in its June 2003 decision in Skandia (C-422/01). Similarly, the proposal would involve no changes with regard to the compliance burden of a holder of a foreign policy. Thus, the proposal will not, even if adopted, be sufficient to bring Swedish legislation in line with EU law.

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