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Tax On Non-Resident Pension Funds In Finland Ruled Discriminatory

by Ulrika Lomas,, Brussels

19 November 2012

The European Court of Justice has ruled that a tax on dividends received by non-Finnish pension funds in Finland is discriminatory.

Currently, resident pension funds can avoid paying tax on dividends from investments by transferring such income into the reserves from which pension payouts are made to participants in the fund. This is because the transfer is regarded as an expenditure.

However, non-resident pension funds cannot take advantage of this arrangement, and are subject to withholding tax at source on dividend income from investments. Finland, supported by Denmark, France, the Netherlands, Sweden, and the UK, argued that the differing tax arrangements for resident and non-resident pension plans was justified on the principle of fiscal territoriality: non-resident funds have only a limited tax liability, since they are taxed only on income arising in Finland, while resident funds are assessed for tax on the basis of their worldwide income.

The ECJ rejected this argument, noting that Finnish legislation took account of the objective of pension funds, which is to accumulate capital to meet future obligations. Non-resident funds “are in a situation objectively comparable to that of resident pension funds as regards Finnish sourced dividends,” it argued, going on to observe that: “the national legislation at issue in the main proceedings does not simply provide for different procedures for charging tax depending on the place of residence of the recipient of nationally sourced dividends, but provides, in fact, that only non-resident pension funds are to be taxed on those dividends.”

The court therefore ruled that the current arrangement is discriminatory and constitutes "a restriction on the free movement of capital prohibited, in principle, by Article 63" of the Treaty on the Functioning of the European Union, as well as by "Article 40 of the European Economic Area Agreement of 2 May 1992."

TAGS: court | tax | investment | pensions | legislation | withholding tax | Finland | dividends | European Union (EU) | Europe

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