“Towards a Single Market for Occupational Pensions Without Keynote Final PowerP… · Spain and Portugal for taxing the investment results of foreign pension funds, whereas domestic

“Towards a Single Market for Occupational Pensions Without

Tax Obstacles”

May 25| 9:00 AM – 9:45 AM

Peter Schonewille, European Commission, DG TAXUD/E/3Competence Centre for Pension Research, University of Tilburg

Email: [email protected], Phone: + 32 2 29 55 919

AGENDA

• EU tax developments since San Diego 2003:

– Cross-border contributions

– Cross-border transfer of capital

– Pan-European pension funds

– Discriminatory taxation of investment results (dividends,

interest, real estate)

– Asset pooling

FOR NON-EU LAWYERS

• Harmonisation of pension taxation rules very unlikely

• Tax Directive would require unanimous support of 27 Member States

• Creation of level playing field in EU will come via anti-discrimination provisions of EC Treaty

• If necessary, via European Court of Justice

EET, TEE, ETT, TTE

• Dominant system in EU is EET: contributions Exempt,

results of fund Exempt, benefits Taxed

• TEE: Luxembourg, Germany (is moving to EET), Poland,

Hungary

• ETT: Sweden, Denmark, Italy, Cyprus

• TTE: normal savings, without tax subsidy

CROSS-BORDER DEDUCTIONS

• Problem was that many EET or ETT states did not give

tax relief for pension contributions paid to pension funds

established in other Member States

• Commission started infringement cases against nine (of

the old 15) EET/ETT Member States for not allowing

cross-border deduction

COURT RULINGS

• Commission vs Denmark, Case C-150/04 of 30 January

2007 and Commission vs Belgium, Case C-522/04 of 5

July 2007:

Tax relief for contributions paid on pension contracts with

domestic providers and no such relief for contributions

paid to institutions in other Member States is against the

EC Treaty

DISCRIMINATION ELIMINATED

• Pension funds can now receive contributions from all

Member States without tax discrimination, only situation

in Bulgaria (€ 360 per annum) remains unclear

• Conclusion: Main tax barrier for cross-border labour

mobility and pan-European pension funds has been

eliminated

PENSION CAPITAL TRANSFER

• Mobile workers may wish to transfer their pension capital

to fund of new employer

• Multinationals with pan-European fund may want to

centralise pension capital in pan-European fund

• Otherwise they need to continue to operate their old

funds + new pan-European fund

OUTBOUND RESTRICTIONS

• European Court of Justice in the same Commission vs

Belgium, C-522/04: If domestic transfers are tax free

taxation of outbound transfers is forbidden

• This case should help to convince other Member States

to change their law where necessary

LIMITED INFORMATION

• In this stage only Belgium, Greece, Lithuania,

Luxembourg and the Netherlands appear to allow

outbound transfers and have no tax discriminations

• Infringement cases will come

• Please send email to Commission if you encounter tax

discrimination

PAN-EUROPEAN PENSION FUNDS

PENSION FUND DIRECTIVE

Officially: “Directive 2003/41/EC of the European

Parliament and of the Council of 3 June 2003 on the

activities and supervision of institutions for occupational

retirement provision (IORPs)”

PURPOSES DIRECTIVE

• Help to create a Single Market for occupational pensions

• Set minimum standards for prudential supervision

• Provide a single passport for cross-border pension provision

• Guarantee a high degree of security for workers and companies

REVISION DIRECTIVE

• Commission is examining whether solvency rules should

be changed

• Commission organises Wednesday 27 May 2009

conference in Brussels

• Will be for new Commissioner for the Internal Market to

decide on way forward

THE MARKET

SEVEN TRILLION

• Large potential pan-European pension market

• € 7.000.000.000.000 capital with pension funds at stake

• Not all Member States appear interested

• Only Ireland, Luxembourg, Belgium and the Netherlands

NUMBER OF IORPS

• 11 November 2008: CEIOPS reports 70 IORPS with

cross-border activity in EU, 31 new ones since entry into

force of Directive. 22 new IORPS since January 2007

• Directive also applicable in Norway, Iceland and

Liechtenstein, members of European Economic Area

(EEA) Agreement

WORLD PERSPECTIVE

• Clients for pan-European solutions are by definition

multinationals

• Many multinationals have subsidiaries outside the

EU/EEA

• Pan-European solutions will be unique in the world

LIABILITY POOLING

• If and when the EU generates pension providers that

can deal with the social, labour and tax law of up to thirty

different jurisdictions these same providers may be able

to deal with the off-shore arrangements for expats from

non-EEA States

INTEL EXAMPLE

• IORP in Ireland

• Sections for Ireland, UK, Poland and Hungary are

operational

• Sections for Russia, Egypt and Turkey are being

developed

THIRD STATES

• Under some bilateral tax treaties, for instance, Belgium-

US, US will grant tax relief for pension contributions paid

to pan-European pension fund for mobile worker who

was sent from Belgium to US

• Conclusion: Pan-European pension funds may also

provide tax efficient solutions for expats working outside

EU

OBSERVATION

• Companies starting with liability pooling will follow step-by-step approach (see Intel)

• Start where the need is greatest: expats/mobile workers

• Start with one other Member State, and gradually extend number of Member States from which contributions are paid into pan-European fund

DISCRIMINATORY TAXATION OF INVESTMENT

RESULTS OF FOREIGN PENSION FUNDS

INTEREST & DIVIDENDS

• In EET/TEE States domestic pension funds exempt from tax on investment results

• Often exemption at source of withholding taxes on dividend and interest payments, if there is no exemption at source refund procedure for withholding taxes

• However, no exemption at source or relief procedure for foreign pension funds

RESTRICTION

• Result: source State levies higher tax on outbound dividend and interest paid to pension funds then on domestic dividends and interest

• Clear restriction of free movement of capital of Article 56 EC (and possibly Article 43 EC on freedom of establishment)

• No justification in sight

DISRIMINATORY TAXATION OF INVESTMENT RESULTS

• The Commission has already opened infringement

procedures against the Czech Republic, Denmark,

Spain, Lithuania, the Netherlands, Poland, Portugal,

Slovenia and Sweden, Italy, Germany, Estonia, Austria,

Spain and Portugal for taxing the investment results of

foreign pension funds, whereas domestic funds are

exempt

ONGOING PROCESS (1)

• 27 November 2008: Commission refers Spain and

Portugal to European Court of Justice for levying

withholding tax of 18 % (Spain) or 25% (Portugal) on

dividends paid to foreign pension funds while exempting

domestic pension funds from corporation tax

ONGOING PROCESS (2)

• 14 May 2009: Commission sends reasoned opinion to

Poland for exempting Polish pension funds from

corporation tax while levying withholding tax of 19 % on

dividends and 20% on interest paid to foreign pension

funds

FINANCIAL CONSEQUENCES

• Apparently tens of billions Euro at stake

• Many funds in Europe are filing claims with the source

States, as far back as they can

• They have to safeguard their rights themselves

• Commission works only for the future

THIRD COUNTRIES

ARTICLE 56 EC

“H all restrictions on the movement of capital between

Member States

and between Member States and third countries shall be

prohibited.”

THIRD COUNTRIES (1)

• Commission’s cases do not yet concern pension funds

established in third countries

• Free movement of capital also applicable in relation with

third countries

• Many US funds are claiming their dividend and interest

withholding tax back from EU Member States

THIRD COUNTRIES (2)

• No reason why they should not get their tax back

• Investors from third countries should also get national treatment, if relevant tax treaty provides for exchange of information, see Skatteverket v. A, C-101/05 of 18.12.2007

• Tax inspector should be able to check who is the beneficial owner of the dividend

REAL ESTATE INCOME (1)

• Pension fund income from real estate (rent, capital

gains) exempt in EET and TEE States

• Bilateral tax treaties always attribute taxing right on real

estate to source State

• Source States usually use their taxing right

REAL ESTATE INCOME (2)

• Source Member States usually do not include foreign

funds in exemption

• Equally clear infringement as with dividends and interest

• Commission handled one case against the Czech

Republic, which changed its law

• No pension fund cases yet at ECJ

REAL ESTATE INCOME (3)

• One case by Court of Justice, Stauffer, C-386/04 of 14

September 2006, on real estate income of charity

• Court granted national treatment

• One case in France, for Unilever Pension Fund

• French Court gave national treatment

CONCLUSION

• All EET and TEE Member States will need to give

national treatment to pension funds established

elsewhere

• Applies to taxation of dividends, interest and real estate

income, including capital gains

ASSET POOLING

ASSET POOLING

• 10 April 2008: Northern Trust gets agreement of US Department of Labour for US pension capital to be pooled outside US

• This ruling/advisory opinion allows Unilever to put its US pension assets in its Luxembourg pooling vehicle

• Unilever has already pooled over 3 billion of its total of 20 billion pension capital

TAX TRANSPARENT

• Only if the pension fund invests via a tax transparent

pooling vehicle can it claim the 0% withholding tax on

dividend and interest received from EET and TEE

Member States and 0% taxation on real estate income

• It will be even more important that asset pooling vehicles

are tax transparent

CONCLUSIONS

• EU tax law relevant for both liability and asset side of

pension funds

• Great progress is being made in eliminating obstacles to

cross-border activities

• Let the Commission know if you encounter any tax

discrimination

THANK YOU!