Discriminatory dividend taxation

The EU Commission has sent letters of formal notice to Italy and Finland about their rules under which dividends paid to foreign pension funds may be taxed more heavily than dividends paid to domestic pension funds. Italy and Finland are asked to reply within two months. These letters constitute the first step of the infringement procedure of Article 226 of the EC Treaty. Similar letters have been sent to the Czech Republic, Denmark, Spain, Lithuania, the Netherlands, Poland, Portugal, Slovenia and Sweden on 7 May.

Commission addresses differential taxation of investment income

Following complaints by the EFRP, the Commission has initiated Treaty infringement proceedings against a number of member states which do not grant the same preferential tax treatment of investment income (interest, dividends) to pension funds resident abroad as domestic funds receive. Even though there is no direct reference to the Pensions Directive in the text, the relevance of this step to an efficient investment regime of cross-border pension funds is obvious. (FT)

ECJ continues to support cross border pensions

In another important ruling, the European Court of Justice rules against surprisingly recent Danish provisions (law of 2003) permitting tax deductibility of pensions contributions only for institutions located in Denmark in the case C-150/04 Commission vs. Denmark (assisted by Sweden).

Continuing its standing practice, the Court relies solely on the Mutual Assistance Directive 77/799 without having direct recourse to double taxation treaties in order to refute the tax avoidance argument: Furthermore, it must be noted that the mere fact that a taxpayer makes contributions to a pension scheme taken out with an institution established outside Denmark cannot form the basis for a general presumption of tax avoidance or justify a fiscal measure which prejudices the enjoyment of a fundamental freedom guaranteed by the Treaty.

With regards to the cohesion of the tax system, the Court shows that a country's tax system is only adversely affected if the future pensioner takes residence outside of said country before taxable benefits fall due. Since he is entitled to do so under the Treaties, the general refusal to grant a tax advantage is not permissible.

The role of the pension sector

In his recent speech about the role of the pension sector in the economy, Nils Bernstein (Chairman of the Board of Governors of the National Bank of Denmark) traces the path of the small, open Danish economy with its development towards a sustainable budget and private sector savings leading to Denmark going from a debtor to a net creditor nation with a multi-pillared private retirement system. But all is not well: The pension sector is divided in two subsectors of almost the same size - commercial pension companies and labour-market pension funds. While there is practically no competition in the latter, the former shows a strong concentration with 90% of the market under control of the five largest firms. Yet, the commercial sector has a higher average cost base.

Danish changes [DK]

This article describes the circumstances of the recent changes in the Danish retirement provision system in a bit more detail than I've summarised earlier. It appears that the public debate in Denmark takes place at an appropriate level.

Rising retirement age north & south [DK] [GR]

The political debate about the sustainability of static retirement age in the face of rising life expectancy in European countries is beginning to bear fruit. While Alpha Bank of Greece expects (according to this article in Handelsblatt) that the retirement age for recent job starters will have to rise to 75 from the current average of about 60, the local politicians apparently do not grasp the seriousness of the situation quite yet.

Meanwhile, up north in Denmark, a broad consensus among the most important political parties has resulted in an agreement to reform the country's social security system. According to a recent article in NZZ which is not available online, the average productive period of a Danish person went from 40.5 years in 1979 down to 38.5 years in 2005, while at the same time, life expectancy rose by 2.25 years, resulting in the prolongation of the average pension duration from 19.25 years to 21.5 years.

The pragmatic Danes have resolved to raise the retirement age to 67 (from 65) by about 2025. Thereafter, the retirement age will be adapted dynamically to the average life expectancy, which is probably the most sustainable approach.

Court action [DK]

IPE reports today - lacking some precision - that the European Court of Justice has made an "initial judgement" in a case pertaining to pan-european pensions.

To be reported in fact is an opinion of the Advocate General in the case C-150/04 EU Commission vs. Denmark. While it is certainly true that the Court usually follows the reasoning of the Advocate General, it is wrong to speak of it as an "initial judgement".

Materially, the opinion confirms the Court's earlier positions concerning the tax deductibility of retirement premium payments as stated most prominently in the Danner case. The "somewhat diffuse" justification of coherence of a country's system of taxation continues to be weakened, putting additional stress on Denmark's and Sweden's taxation which is not in line with the EET Principle. However, the opinion heavily relies on Double Taxation Treaties to extend said coherence to other Member States. This is a further indication of the functional importance of as dense a network of DTTs as possible.