Transferring pensions across Europe - New ECJ ruling
09 October 2007
This article was first published in Pensions Week, 3
September 2007.
On 5 July 2007, the European Court of Justice ruled on tax
obstacles to cross-border pensions, in the case of European
Commission v Belgium, which followed a previous case involving
Denmark.
The Commission argued that various Belgian tax provisions
impaired the freedom to provide services and the freedom of
movement for persons, both of which are provided for by European
law.
The Belgian tax rules in question, which related to insured
schemes, were:
- employers’ contributions were only tax-deductible if paid to an
insurer or pension fund established in Belgium;
- employee contributions deducted from pay were only tax
efficient if paid to an insurer or pension fund established in
Belgium;
- when pension savings built up in Belgium are paid or allocated
to a taxpayer who has moved outside Belgium, the payment or
allocation is deemed to occur prior to his emigration
(“anti-emigration clause”). As a consequence, tax must be
withheld;
- a tax on transfers of accrued pensions to a fund outside
Belgium;
- requiring foreign insurers to obtain authorisation, before
providing their services in Belgium, for a representative residing
in Belgium, who must personally assume responsibility for Belgian
tax liabilities.
The Court held that each of the rules were illegal under
European Law as argued by the Commission. The fact that the
European Commission took action against the Belgian authorities
shows that the Commission is keen to press forward in removing
barriers to cross-border pension transfers. This enthusiasm to
break down artificial obstacles to transfers survives, even though
attempts to introduce a Directive specifically providing for
portability of pensions show no signs of significant progress.
It is not unusual for the Commission and the ECJ to use basic
European law concepts, such as freedom of movement for persons and
freedom to provide services, instead of introducing specific
detailed legislation relating to a specialist subject.
Clearly, it is easier to enforce transfer of pensions with a
third-party insurer and which are not directly managed by the
employer or trustees connected to the employer. Some countries such
as Spain and Finland do not permit the transfer of a member’s
rights from one employer scheme to another and it is rules such as
this that have made implementation of a portability directive too
difficult.
Belgium had partially anticipated this ruling and amended
various tax provisions in late 2006. The tax efficiency for
contributions now applies where they are paid to insurance
undertakings or welfare institutions established in the European
Economic Area (the EEA), provided other general conditions are met,
and transfers of pension capital and surrender values are no longer
taxable when the transfer is within the EEA. The
“anti-emigration clause” is no longer applicable for taxpayers who
remain within the EEA outside Belgium.
The Belgian tax authorities still monitor for “abusive
constructions” by which taxpayers attempt fictitious transfers of
residence to a State where pension funds or surrender values are
taxed at a lower rate (or not taxed at all).
Generally, the rules in the UK would allow for cross-border
membership of schemes (although funding rules are more onerous for
defined benefit schemes). They also permit transfers from a
UK-based scheme to a scheme abroad, provided that scheme is a QROPS
(qualifying recognised overseas pension scheme). QROPS status is
achieved by meeting the tests set out in the Finance Act 2004 and
registering with the Revenue. But, at a practical level, the
availability of QROPS varies widely from country to country. For
instance, there are over 200 in the Republic of Ireland but only
three in Italy and four in Spain.
The integration of European pension arrangements will continue as,
bit by bit, barriers are broken down. For those who welcome that
development, the interventionist approach of the Commission will be
applauded. Whether increased portability turns into regulatory
arbitrage (that is, where providers and/or scheme members relocate
their pension saving to territories with lighter touch regulation)
is something that we will only know in the years to come.
For further information, please contact
Corinne Merla or
David Gallagher.