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Brussels, 27 November 2008

Direct taxation: The European Commission takes steps against the United Kingdom as regards the deductibility of cross-border pension contributions

The European Commission has formally requested the United Kingdom to amend its legislation which in certain circumstances, denies deductibility of pension contributions paid to pension funds established outside the United Kingdom. The request takes the form of a reasoned opinion (second step of the infringement procedure of Article 226 of the EC Treaty). If no satisfactory reaction to the reasoned opinion is received within two months, the Commission may decide to refer the matter to the Court of Justice of the European Communities.

The reasoned opinion adopted by the Commission concerns the income tax rules which deny workers established in the UK the right to deduct pension contributions they pay to pension funds established elsewhere in the EU or the EEA from their UK taxable income. UK legislation denies such deductibility if an overseas pensions fund does not provide certain information to the UK tax authorities. In particular, the UK requires information on the date that the pension is to start to be paid to an individual and on the capital value of the pension. The denial of deductibility particularly affects cross-border workers who move to the UK whilst continuing with a pension fund established in their state of origin.

The Commission is of the opinion that the UK should allow deductibility for all pension contributions paid by resident taxpayers to funds established in other EU and EEA Member States as is the case for similar contributions to domestic pension funds. In cases where the foreign pension provider is unwilling or unable to provide the required information, the non-deductibility of the contributions may in practice oblige the mobile worker to replace his foreign pension scheme with one provided in the UK in order to be eligible for a tax deduction in the UK. A person resident in another Member State may thus be dissuaded from exercising his right of free movement by taking up employment in the UK.

Furthermore, the information requirements constitute a costly formality, particularly for foreign pension providers that do not wish to enter the UK market but merely provide services to existing scheme members who have exercised their right of free movement.

Consequently, the Commission considers that the United Kingdom's legislation, in its current state, is not compatible with Articles 39, 43 and 49 EC Treaty and Articles 28, 31 and 36 of the EEA Agreement.

The Commission's reference number for the case at issue is 2005/2320.

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