EUROPE - European governments are being put under pressure by the European Commission and could face court action for being in breach of EU law for their taxation of foreign pension fund investors.

The European Federation for Retirement Provision (EFRP) lodged complaints with the European Commission in December 2005 against 18 EU member states for infringements concerning dividend and interest taxation.

Now the Commission has send out letters to the Czech Republic, Denmark, Lithuania, the Netherlands, Poland, Portugal, Slovenia, Spain and Sweden and given the States two months in which to amend their legislation or they could face legal proceedings through the European Courts of Justice (ECJ).

Several member states currently exempt domestic pension funds from a requirement to pay corporate and income tax as well as any withholding tax on dividend and interest paid. Even in cases where the tax has to be paid pension funds can often reclaim it at the end of the tax year.

However, foreign pension funds who invest in domestic companies have to pay all or some of the taxes and are not eligible for refund.

The European Commission has dropped an EFRP complaint against Hungary and is currently still looking into complaints against Austria, France, Germany, Estonia, Finland, Italy, Latvia and the UK.

According to the EFRP, the commission's decision could lead to major refund payments to pension funds which have filed complaints.

The decision comes only months after the ECJ had ruled against Danish tax legislation under which higher taxes are levied for pension contributions made to products offered by foreign insurers than to domestic providers.

A spokesman for the Danish ministry of taxation told IPE in February the government still needed some time to change the legislation. No one at the Ministry was immediately available to comment on the new tax complaint filed against the country.