Commission strategy to remove tax obstacles to cross-border pension provision - frequently asked questions (See also IP/01/575)
European Commission - MEMO/01/142 19/04/2001
Brussels, 19 April 2001
Commission strategy to remove tax obstacles to cross-border pension provision - frequently asked questions (See also IP/01/575)
Why has the Commission departed from the more conventional route of making a proposal for a Directive?
Because the Commission considers that the most effective and immediate method of tackling tax obstacles to cross-border pension provision is to apply the rules that already exist in the EC Treaty on free movement of capital, free movement of labour and the freedom to provide services. It is clear that the EC Treaty itself obliges Member States to eliminate discrimination against pension institutions established in other Member States, and this is backed up by recent developments in the case law of the European Court of Justice. On the basis of the interpretation of the Treaty by the Court it has now become clear that national restrictions that impede the provision of pensions and life assurance without objective justification are incompatible with Community law. Therefore, a Directive requiring the elimination of discrimination against cross-border schemes would at best do no more than reiterate Treaty rights and at worse could make unconditional Treaty rights hostage to the political process.
The Commission approach is therefore to clarify the Treaty rules in this area. The Commission in its initiative aims to explain where, in its view, a balance has to be struck between the obligation imposed on Member States by the Treaty to allow persons, services and capital to operate freely within the Internal Market and the legitimate social policy aims which Member States pursue through their tax rules.
Discussions with Member States over the last few years have suggested that many of them only wish to proceed on a "step-by-step" basis in eliminating the tax obstacles to cross-border pension provision. Because of the unanimity rule, it is therefore unlikely that the Council would agree a Directive with anything more than a very limited scope, eliminating discrimination only for workers posted to another Member State for a limited period of time. A Directive limited to posted workers would go much less far than the requirements of the Treaty itself. Other migrant workers would not be covered, nor would such a Directive deal, as the present Commission strategy does, with the problems of employers who wish to centralise their arrangements for pension provision.
What work has the Commission previously done in this field?
The Commission has already taken a number of initiatives concerning the taxation of occupational pensions. The Commission proposed including an article on the tax treatment of pension contributions in the Directive on the safeguarding of supplementary pensions which was adopted by the Council on 29 June 1998. However, Member States did not wish to retain the tax article. Since 1997, the Commission has been engaged in a process of intensive consultations with Member States and with the pension fund industry and industry in general.
On the basis of these consultations, the Commission presented a strategy in May 1999 dealing inter alia with tax issues designed to enable supplementary pension schemes to benefit from the Internal Market and the euro (see IP/99/328). The Commission referred to the need to abolish the tax discrimination affecting the products offered by pension funds and insurance companies across borders and suggested focusing first on the tax treatment of cross-border contributions paid by migrant workers to occupational pension institutions. The Commission in its latest initiative concentrates on the tax dimension, building on the principles set out in the 1999 report. This complements the proposal for a Directive which the Commission issued on 11 October 2000 to allow cross-border pension provision and investment while ensuring adequate prudential supervision (see IP/00/1141). Like that proposal, it heeds the call of the Lisbon European Council of March 2000 to speed up measures "facilitating the successful participation of all investors in an integrated market eliminating barriers to investment in pension funds". It also forms part of the new strategy to open up pan-European labour markets by 2005 which the Commission adopted on 28 February this year.
What are the different rules currently applied by Member States to the taxation of pensions?
The large majority of Member States have what is described as the EET system (Exempt contributions, Exempt investment income and capital gains of the pension institution, Taxed benefits). Denmark, Italy and Sweden have the ETT system (Exempt contributions, Taxed investment income and capital gains of the pension institution, Taxed benefits) while Germany and Luxembourg operate a TEE system (Taxing the contributions and Exempting the pension institution and the benefits). Germany also applies the EET system in certain cases. But even among EET States there are significant differences in the level of tax deductibility of contributions to pension schemes. Such differences reflect not merely the individual preferences of Member States in the design of their tax rules but also more fundamental choices in the structure of their systems of pension provision, in particular the relative size of first and second pillar schemes.
What are the different types of pension arrangements in Member States?
There are three main categories of retirement provision in the Member States. The first pillar consists of statutory social security schemes, in which participation is generally compulsory for the entire employed or resident population. The second pillar consists of occupational schemes which may be set up unilaterally by an employer or as a result of a collective agreement or a contract agreed individually or collectively between the employer and the employees or their respective representatives. The third pillar consists of individual schemes which generally take the form of contracts taken out by individuals in their personal capacity with life assurance companies or other financial institutions.
Why has the Commission not dealt with the tax issues involved in statutory social security and personal pension provision in this report?
As the present Commission strategy aims at complementing the proposed Directive on occupational retirement provision, its focus is primarily on occupational pensions and the pension institutions covered by that proposal, that is to say, pension institutions which operate on a funded basis and are outside the statutory social security systems. Nevertheless, many of the points made by the Commission apply equally to personal pension provision and life assurance services.
As regards statutory social security pensions, there is already Community legislation in place to protect workers' rights. Council Regulation 1408/71 provides for co-ordination of national social security systems. It lays down rules to establish the Member State where benefits are derived, and thereby implicitly where any contributions due have to be made. The Commission has no information about any kind of discriminatory tax treatment of such contributions paid in cross-frontier situations (e.g. contributions paid by frontier or posted workers). The Commission would, of course, take any necessary legal steps if it did hear of any such discrimination.
What has been decided by case law concerning discrimination in the pensions field?
It is clear from the developing direct taxation case law of the European Court of Justice that there are no grounds justifying a tax treatment of schemes operated by pension institutions established in other Member States which is less favourable than that of schemes operated by resident pension institutions. The Court of Justice has rejected numerous defences put forward by Member States to justify restrictions on the free movement of persons, services and capital guaranteed by the Treaty. For example, it is clear that the absence of harmonisation of Member States' laws does not justify non-application of the Treaty freedoms. Moreover, a Member State cannot justify discrimination on the ground that its removal will entail a loss of tax revenue. Neither do the absence of reciprocity on the part of other Member States nor the difficulties in obtaining information in cross-border cases constitute valid defences.
What specific proposals does the Commission make to improve information exchange between Member States?
The Commission proposes that a system of automatic information exchange could be put in place to meet Member States' concerns that they may be unable to enforce their tax rules if they allow their residents to participate in foreign pension schemes. The existing Directive on Mutual Assistance in Tax Matters Directive (77/799) provides for automatic information exchange. The Commission proposes that the details of the information exchange, in particular the information to be reported and the format and frequency of the information exchanges, be agreed in the Committee provided for in that Directive. Improvements to the legislative framework governing information exchange on supplementary pensions could also be considered in a broader framework, which would also include the results of the work on information exchange on savings income and the follow-up to the report of the Ad Hoc Group on Fraud to the Council in June 2000. At a later stage the Commission suggests that consideration could be given to extending information exchange to personal pension schemes, including life assurance.
What does the Communication propose with a view to eliminating the problems of the differences between Member States' tax arrangements for pensions?
The differences between Member States' tax arrangements for pensions as described above may lead to problems of double taxation or non-taxation for migrant workers or persons retiring to another Member State. For example, an employee may work in a Member State which gives only limited relief for pension contributions but retire to a Member State which provides for comparatively full taxation of benefits. Conversely, such differences can lead to non-taxation. For example, an employee may work in a Member State giving generous relief for contributions and then retire to a Member State which has generous tax arrangements for pension benefits.
The Commission suggests that, in the long-run, alignment of Member States' pension taxation systems on the basis of the EET principle that eleven Member States already operate would be desirable so as to reduce the mismatches which lead to double taxation and non-taxation. In the short-term, the Commission suggests that Member States should resolve mismatches through unilateral or bilateral solutions. The Commission would be prepared to assist Member States by studying existing provisions in, for example, bilateral tax treaties which could be solutions if applied more generally. A Community framework such as a multilateral convention or co-ordinating measures at Community level could also be considered.
How does the Commission propose to go about bringing Member States' discriminatory tax rules before the Court of Justice?
The Commission now intends to commence a detailed examination of Member States' national rules in the field of pensions taxation. A considerable amount of information has already been gathered. In a fair, even-handed way it intends to take the necessary steps to ensure effective compliance of these national rules with the fundamental freedoms of the EC Treaty. Where it considers that Member States have in this area failed to fulfil an obligation imposed on them by Community law it will contact the Member States concerned. Where issues cannot be resolved, the Commission will be prepared to bring cases before the Court of Justice on the basis of the Treaty.
Is this initiative a step by the Commission in the direction of harmonising Member States' income tax systems?
No. The Commission has frequently stressed that there is no need for harmonisation of the personal tax systems of Member States. These are very deeply rooted in social and political preferences and traditions and should be left to the Member States even when the Community achieves a much higher degree of integration than at present. At the same time, however, it is clear that even non-harmonised personal taxes cannot interfere with the exercise of the rights conferred by the EC Treaty to free movement of persons, services and capital within the Internal Market. The Commission must, as guardian of the Treaty, ensure the elimination of unduly restrictive or discriminatory tax rules. But, with due regard to this obligation, it is seeking to work with Member States to achieve a co-ordinated approach to deal with the diversity of their rules rather than attempting to achieve harmonisation.