| Shake-up in pensions |
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| A case on which the ECJ will shortly rule is likely to have major implications for pension schemes throughout the EU. It may make it possible for a group to have a single pension scheme for its employees in all EU member states. |
On 19 April 2001 the EU Commission published proposals designed to ensure that individuals who wished to do so could contribute to pension schemes outside their home member state, and that pension institutions who wished to do so could provide pensions across borders without encountering regulatory or taxation barriers. The EU stated that it would monitor member states’ national pension rules and take necessary steps to ensure their compliance with the EU treaty ie to remove obstacles to cross border pension provision.
ECJ supplies action
Not for the first time the EU Commission has found that another EU institution, the European Court of Justice, is moving even faster than the Commission.
The Advocate General of the ECJ has issued an opinion on a case taken by a Mr Danner. Mr Danner is a resident of Finland who made contributions to a German pension scheme. Had he made those contributions to a pension scheme situated in Finland he would have obtained tax relief in Finland on his contributions. But because the scheme was a German scheme and not a Finnish scheme, he was denied tax relief in Finland.
Mr Danner challenged this treatment in the ECJ. The Advocate General has upheld his challenge. A final court judgement is expected very shortly. It does not have to follow the Advocate General’s opinion, but usually does so.
The Bachmann legacy
The main problem which Mr Danner faced was that the ECJ had many years ago considered a similar case taken by a Mr Bachmann. Mr Bachmann was a resident of Belgium and was denied in Belgium tax relief for contributions which he made to a pension scheme in another country. Mr Bachmann challenged this tax treatment before the ECJ. He lost his case.
The Bachmann case is one of the few instances in which the ECJ has ever upheld the entitlement of member states to discriminate against cross border economic activity. It has ever since been felt to be an anomalous case.
The Bachmann case had been decided on the proposition that the tax relief given by Belgium for pension contributions was intimately related to the right of Belgium to tax the resulting pensions. Belgium argued that if it gave tax relief for contributions to foreign pension schemes, it might not be able to tax the pensions that would ultimately result. As a result the integrity of its tax system would be undermined.
That argument was accepted by the court as being a justification of discriminatory treatment that interfered with the freedom of movement of workers and the freedom of establishment.
Mr Danner bypassed the Bachmann obstacle by challenging the pension rules in Finland on different grounds to those which Mr Bachmann used. He challenged it under four other articles of the EU treaties – the freedom to provide services, the free movement of capital, discrimination on grounds of nationality, and the rules against unauthorised state aid.
The usual excuses
The Finland government inevitably brought forward the argument that, like Belgium, they needed to protect the integrity of their tax system. Tax relief on deductions was intimately related to the right to tax the resulting pension.
The Advocate General blew this argument out of the water. He pointed out that there was in fact little or no link between tax relief on contributions to pension schemes, and taxation of pensions. Finland would tax a pension whether or not the recipient had got a tax deduction on his contributions to the scheme which pays the pension. If an individual who obtained tax relief on his contributions to a pension scheme emigrated to another state prior to receiving the pension, generally the double tax agreement between Finland and that other state would give to the other state the sole right to tax the pension.
This opinion of the Advocate General not only shoots down the arguments used by the Finland Government, but it also exposes the reasoning in the Bachmann case as having been completely false. The Advocate General noted that he did not have evidence before him as to whether Belgium similarly taxed all pensions regardless of tax relief on contributions but he thought it likely. The judgement in the Bachmann case now looks unsound.
The Advocate General pointed out that while Finland was denying Mr Danner tax relief on his contributions to the German pension scheme, the Germany Finland double tax agreement would entitle Finland to tax any resulting pension for so long as Mr Danner was resident in Finland.
Finland put forward other arguments such as that it would be difficult for it to verify that a foreign pension scheme complied with the rules it had laid down for the approval of a pension scheme for tax relief. The Advocate General pointed out that a total prohibition on tax relief for contributions to overseas schemes was a disproportionate reaction to any such difficulty. In any event, Finland would have been entitled to make it a condition of giving tax relief, that any information that it required about the pension scheme would be provided to it. This would have been a less restrictive approach than completely denying tax relief in all circumstances.
Pan European pensions?
If the ECJ confirms the Advocate General’s opinion it will have at a stroke largely achieved the objectives set out by the EU Commission in April of 2001. It will confirm that member states must not discriminate as between domestic pension schemes and foreign pension schemes in giving tax relief for contributions, or any other form of tax relief.
Indeed there must be an implication that where a country gives tax relief to a pension fund in respect of its income and capital gains, that it must do so also to pension funds located in other EU member states.
A confirmation of the Advocate General’s opinion would open up the way to the creation of single pan European pension schemes for multinational groups. The pensions industry in the EU and indeed the entire savings and investment services industry may be on the threshold of a sea change. |
Michael Kelly is Head of KPMG’s Pension and Actuarial Services and an Associate of the Irish Institute of Pension Managers.
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| Article appeared in the April 2002 issue.
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