EUROPE – The European Commission has referred Spain to the European Court of Justice over pension taxation and has asked the UK to amend its legislation.

“The European Commission has decided to refer Spain to the Court of Justice because pension contributions paid to non-Spanish funds are not tax deductible while contributions paid to domestic funds are,” the Commission said.

“Although Spain has admitted in the previous correspondence that the legislation is incompatible with EU law, it is not willing to modify its legislation until the implementation of the Pension Fund Directive which is foreseen for 23 September 2005. This proposed timetable is not acceptable.”

It added: “The Commission considers that this Spanish legislation discourages foreign pension providers from offering their services on the Spanish market and discourages individuals from taking out voluntary pension insurance with foreign institutions.”

“It was in the pipeline,” said Leonardo Sforza, director of European research at Hewitt Associates in Brussels. “It’s a good move – it shows the Commission has not gone on holiday. It’s a good sign to other countries as well.”

He said Spain’s attempt to tie its response with the directive was a delaying tactic. The directive and pension taxation were “two different questions”.

Neither the Spanish finance ministry nor pension fund association Inverco were immediately available for comment.

The Commission has also sent a formal request – in the form of a ‘reasoned opinion’ - to the UK to amend its legislation. It said: “The Commission considers that the beneficial tax treatment of domestic schemes is incompatible with the freedoms mentioned in the EC Treaty.”

If the UK does not provide a satisfactory response the Commission may refer the case to the ECJ.

“The Commission is aware of the complete overhaul of the pension system in the UK which is currently before the UK Parliament,” the Commission stated. But it said that the government has not provided sufficient information on how it intends to tackle the problems of “incompatibility” with EU legislation.

“It is unacceptable that some member states still practice tax discrimination against foreign pension funds,” said taxation and internal market commissioner Frits Bolkestein.

"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 added that the Commission has received undertakings from Belgium, Ireland, Portugal and France that they will change their pension tax legislation.