The defenestration of Prague

Last week, the ECJ passed an interesting judgment in the case C-343/08 EU Commission vs Czech Republic. The Czech Republic argued that there wasn't any point in transposing a number of provisions of the directive as IORPs were not provided for in the Czech retirement system which only knows the first and the third pillar. The Court however did not share that existentialist line of argument and took the constructivist view that a second pillar may be introduced at any time, in which eventuality the rules required by the directive already need to be in place.

While the Czech position appeals to a layman's common sense rather better than the somewhat fundamentalist approach taken by the Court, one important aspect has escaped IPE's attention: The judgment includes a thinly veiled hint (paragraphs 63, 64) that the Court may find the Czech prohibition on IORP establishment in the country in breach with the Treaties' rules on free circulation. That in itself is a valuable signal.

ECJ deals first blow

In an important decision in case C-522/04 Commission vs. Belgium, the Court's second chamber has found, among other things, that Belgian tax provisions effectively taxing retirement capital to be transferred to an IORP resident outside of Belgium to be in breach of several Treaty freedoms (recital 40) and therefore inadmissible (IPE).

This is the first decision dealing with an issue that is critically important to the establishment of cross-border pensions, and its favourable, albeit unsurprising outcome virtually removes yet another area of legal uncertainty. It is interesting to note that the Court evaluates the equivalent applicability of its reasoning to the EEA, which it confirms.

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.

Infringement proceedings

The EU Commission swings into action with some treaty infringement related proceedings. It has decided to take Sweden to the ECJ about the country's practise not to grant tax deductibility for pensions contributions paid to insurers resident abroad (but within the EEA) in line with the EET principle. Strangely, there seems to be no reference to the Pensions Directive.

In other news, the Commission is satisfied with recent modifications of Spanish legislation which also did not allow for tax deductibility of cross-border pensions contributions. The infringement case against Spain is therefore closed - in this case with reference to the Pensions Directive btw. Notably, the new Spanish tax rules explicitly allow deductibility for IORPs resident in the EEA, and specifically Liechtenstein, which removes an important legal uncertainty with Liechtenstein IORPs, at least with regards to their relation to Spain.

Commission takes action

The EU Commission has issued a reasoned opinion against Belgium, Cyprus, Czech Republic, Finland, France, Italy, Lithuania, Slovakia, Slovenia, Spain and the United Kingdom for non- or partial transposition of the Pensions Directive into their national law, thereby capturing all the member states that it has identified earlier for lagging. The next step in the infringement proceedings according to Art. 226 EU Treaty would be court action in front of the ECJ after two months time (via IPE).