EU Urges Estonia End Discriminatory Taxation Of Pensions

by Ulrika Lomas, Tax-News.com, Brussels

20 October 2008

The European Commission has sent Estonia a formal request to amend its rules that provide for higher taxation of pensions paid to non-residents in comparison to pensions paid to resident taxpayers.

The request takes the form of a reasoned opinion. If there is no satisfactory reaction to the reasoned opinion within two months, the Commission may decide to refer the matter to the Court of Justice of the European Communities.

The reasoned opinion concerns non-resident pensioners with a modest income which is comparable to the tax exemption allowances applicable to pensioners in Estonia (EEK 63,000 or EUR4,026). If such taxpayers receive all their income in Estonia, they can benefit from the Estonian personal allowances and do not have to pay tax on their income. However, where the income earned in Estonia does not exceed 75% of their worldwide taxable income, non-resident taxpayers are not able to benefit from the personal deductions available to residents.

The Commission is of the opinion that, in these particular circumstances, Estonia cannot assume that the Member State of residence is in a position to take account of the taxpayer's personal circumstances and should therefore also make the personal deductions available to such non-resident taxpayers.

The Commission considers that the restrictive application of personal allowances in the Estonian legislation constitutes a discrimination prohibited by Article 39 the EC Treaty concerning the free movement of workers, as the favourable treatment is not open to non-resident taxpayers who are effectively in the same situation as resident pensioners.

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