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EC Gets Tough On Pension Fund Tax Discrimination

by Ulrika Lomas, for, Brussels

19 December 2003

The European Commission on Wednesday warned that France, Belgium, Portugal and Spain must bring their tax treatment of pension funds from other EU member states in line with their treatment of domestic funds, or face the possibility of legal action.

In a statement, in which it was explained that the Commission considers preferential treatment of domestic pension funds to be incompatible with EU rules on the free movement of workers and capital, Internal Market Commissioner, Frits Bolkestein explained that:

"The Commission is determined to tackle tax discrimination against occupational pension funds in other member states." He continued:

"Unless member states end tax discrimination, the EU will continue to deny future pensioners the full potential benefits of a pan-EU single market for pensions."

If the four countries fail to act on this matter within the next two months, the EC has threatened to launch legal proceedings, as it has already done in the cases of Denmark, Ireland, and the UK.

According to the Commission, the Spanish Government has admitted that the current Spanish provisions are not compatible with EU law, and has announced that it intends to make the necessary amendments of its legislation before 23 September 2005 (which is the deadline for the implementation of the pension funds Directive 2003/11). The Commission, however, estimates that this timetable is not sufficient.

France, meanwhile, has also admitted in its reply to the letter of formal notice that the assessment made by the Commission is correct and that the French tax rules are not compatible with the Treaty freedoms, and has committed to changing its legislation. However, it has not provided full details or a timetable and some proposed amendments still impose certain conditions which, according the Commission, constitute an obstacle to the Treaty freedoms.

The Belgian Government has not yet provided any definitive reply as to its intentions with regard to the points raised by the Commission, and Portugal has argued that its tax legislation is coherent with EU law, in that there is a link between tax deductibility of contributions and taxation of pensions in case of Portuguese pension funds and between the non-tax deductibility of contributions and the non-taxation of pensions in case of foreign pension funds (similar to the coherence accepted by the Court in the Bachmann judgement, C-204/90 of 28 January 1992).

However, the Commission has warned that it is of the opinion that such cohesion does not exist in the Portuguese legislation.

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