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Brussels, 25 June 2009

Direct taxation: The European Commission requests Finland and Denmark to end discriminatory taxation of foreign pension funds

The European Commission has sent Finland and Denmark formal requests to amend their legislation which leads to discriminatory taxation of foreign pension funds. The Commission's requests take the form of a ‘reasoned opinion’ (second step of the infringement procedure of Article 226 of the EC Treaty). If Finland and Denmark do not reply satisfactorily to these reasoned opinions within two months the Commission may refer the matter to the European Court of Justice.

According to the Finnish legislation, dividends paid by a company which is resident in Finland for tax purposes to a non-resident pension fund, are subject to a withholding tax on gross income at a rate of 19,5%.

On the other hand, Finnish pension funds are taxed under a special regime: only 75% of dividend income on investment assets is subject to corporation tax. Since the nominal corporate income tax rate is 26%, the resulting tax rate for dividends paid to Finnish pension funds is 19,5%. However, tax is calculated on their net income, i.e. after deduction of costs as well as current pension liabilities. In practice, the effective tax rate on dividend income paid to a Finnish pension fund is therefore lower than 19,5% while foreign pension funds do not benefit from any similar reduction of the tax base on which the withholding tax is applied.

The Danish legislation provides for a similar difference in treatment between foreign and domestic pension funds. Dividends paid to foreign pension funds are effectively subject to a tax rate of 15% on the gross amount of the dividend. Danish pension funds, on the other hand, are subject to a yield tax of 15% on a net basis.

The difference in treatment between foreign and domestic pension funds amounts to an obstacle to the free movement of capital within the meaning of Article 56 EC. The effect of the legislation is to make cross-border transfer of capital less attractive by de facto taxing dividends transferred to foreign pension funds at a higher rate.

In the Commission's view the difference in treatment constitutes an arbitrary discrimination which cannot be justified on the grounds provided under Article 58 EC (which allows discriminative measures justified on grounds of public policy or public security).

The Commission's case reference numbers are 2006/4103 (Denmark) and 2006/4096 (Finland).

For the press releases issued on infringement procedures in the taxation or customs area see:

For the latest general information on infringement measures against Member States see:

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