The European Commission has begun infringement proceedings against two Member States: against Estonia, for placing a higher rate of tax on certain pensions payments to non-resident taxpayers; and against Germany, for placing a higher tax burden on foreign pension institutions.
With regard to the first decision, the European Commission has decided to refer Estonia to the European Court of Justice over its discriminatory taxation of pensions paid to non-residents. Under Estonian rules, pensions paid to low-income, non-residents are taxed at a higher rate compared to pensions paid to low-income, resident taxpayers.
The decision concerns non-resident pensioners with low global incomes which do not exceed the tax exemption allowances applicable to pensioners in Estonia. If such taxpayers receive almost all their income in Estonia, they can benefit from the Estonian personal allowances and do not have to pay tax on their income.
However, non-resident taxpayers who earned less than 75% of their global taxable income in Estonia cannot benefit from the personal deductions available to residents.
The Commission is of the opinion that, in these particular circumstances, the Member State of residence is not in a position to take account of the taxpayer's personal circumstances.
Therefore the Commission considers that Estonia should calculate the tax amount due in Estonia taking into account the totality of his or her income, and also make the same personal deductions available to resident and non-resident taxpayers.
The Commission considers that the restrictive application of personal allowances in the Estonian legislation constitutes a discrimination prohibited by Article 39 of the EC Treaty concerning the free movement of workers, as the favourable treatment is not extended to non-resident taxpayers who are effectively in the same situation as resident pensioners.
With regard to the case against Germany, meanwhile, the Commission has sent a formal request asking that the country amend legislation which it considers leads to discriminatory taxation of foreign pension institutions. The Commission's request takes the form of a ‘reasoned opinion’ (the second step of the infringement procedure of Article 226 of the EC Treaty).
In Germany, dividends paid by German companies to German "Pensionskassen" are either subject to a reduced withholding tax rate, or the "Pensionskasse" can benefit from a partial refund of the withholding taxes. However, similar institutions established elsewhere in the EU and the European Economic Area cannot benefit from this reduced rate or partial refund.
For another category of German pension institution, the "Pensionsfonds", the dividends received are taken into account in the annual tax assessment procedure. Therefore, they are taxed on a net basis at the general corporate tax rate of 15%. However, dividends paid from Germany to similar foreign institutions are subject to a final withholding tax of 25% on the gross dividend, without the possibility of deducting any costs.
The same rules apply to interest payments paid to "Pensionskassen" and "Pensionsfonds". Therefore, the taxation of interest paid to similar foreign pension institutions is also addressed in the Commission's reasoned opinion.
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