EU Tells Spain And UK To Change Pension Tax Rules

by Ulrika Lomas, Tax-News.com, Brussels

12 July 2004

The European Commission last week announced that it is taking action against both Spain and the United Kingdom over the application of tax laws relating to pension contributions.

Under current Spanish law, pension contributions are deductible from income tax only if they are contributed to a pension institution based in Spain. Contributions made by an employer are also exempt from income tax under these circumstances.

However, if payments are made to pension firms established elsewhere, the employee cannot deduct the contributions he pays himself, and is subject to income tax on the employer’s contributions.

According to Commissioners, this legislation discourages foreign pension providers from offering their services on the Spanish market, and also discourages individuals from taking out voluntary pension insurance with foreign institutions.

While Spain has admitted that its current rules are incompatible with EU law, it is not willing to modify its legislation until the implementation of the Pension Fund Directive, which is not likely to take place before 23 September 2005, a situation the Commission described as “not acceptable”.

Consequently, the Commission has decided to refer the matter to the European Court of Justice.

In the case of the UK, exemption from income tax of employer contributions and deductability of employee paid contributions depends on the form of the pension arrangement (a trust) and the presence of a representative in the respective Member State to fulfil the administrative duties.

The EU is to formally request that the United Kingdom brings about changes to these rules by extending the favourable tax treatment to contributions paid to schemes not fulfilling these specific national requirements.

The request has been sent in the form of a Reasoned Opinion, the second stage in infringement proceedings.

Frits Bolkestein, Taxation and Internal Market Commissioner, commented: “It is unacceptable that some Member States still practice tax discrimination against foreign pension funds.”

"A fully functioning Internal Market for occupational pensions is essential to ensure that citizens are able to exercise their rights to free movement which are enshrined in the EC Treaty,” he noted.

Bolkestein added that Belgium, Ireland, Portugal and France have all pledged to amend pension tax legislation at the request of the Commission.

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