Towards a Single Market for Occupational Pensions Without Tax Obstacles

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2 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/3 Competence Centre for Pension Research, University of Tilburg [email protected], Phone:

3 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

4 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 antidiscrimination provisions of EC Treaty If necessary, via European Court of Justice

5 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

6 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

7 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

8 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

9 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

10 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

11 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 to Commission if you encounter tax discrimination

12 PAN-EUROPEAN PENSION FUNDS

13 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)

14 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

15 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

16 THE MARKET

17 SEVEN TRILLION Large potential pan-european pension market capital with pension funds at stake Not all Member States appear interested Only Ireland, Luxembourg, Belgium and the Netherlands

18 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

19 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

20 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

21 INTEL EXAMPLE IORP in Ireland Sections for Ireland, UK, Poland and Hungary are operational Sections for Russia, Egypt and Turkey are being developed

22 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

23 OBSERVATION Companies starting with liability pooling will follow stepby-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

24 DISCRIMINATORY TAXATION OF INVESTMENT RESULTS OF FOREIGN PENSION FUNDS

25 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

26 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

27 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

28 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

29 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

30 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

31 THIRD COUNTRIES

32 ARTICLE 56 EC all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited.

33 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

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

35 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

36 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

37 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

38 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

39 ASSET POOLING

40 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

41 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

42 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

43 THANK YOU!

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