EUROPE – European pension industry players have welcomed the European Commission’s decision - confirmed today - to take action against Denmark, Belgium, Spain, France, Italy and Portugal over discriminatory taxation of foreign pension funds.

“Our association warmly welcomes this action by Commissioner Bolkestein,” said Chris Verhaegen, secretary general of the European Federation for Retirement Provision.

The Commission confirmed the action in a statement. “The European Commission has sent a formal request to Denmark to amend its legislation under which pension contributions paid to non-Danish funds are not tax deductible while contributions paid to domestic funds are,” the statement said.

“The Commission has also sent official requests for information to Belgium, Spain, France, Italy and Portugal regarding what appears to be similar discriminatory tax provisions in those Member States,” it added.

It says that it considers preferential treatment for domestic pension funds ”incompatible with the EC Treaty”.

The EFRP's Verhaegen added: “It constitutes a major step forward to pan-European pension funds. The governments of Belgium, Denmark, France, Italy, Spain and Portugal will now have to make a choice: modify their tax legislation or wait for referral to the European Court of Justice.”

The EFRP said the move gives a “strong boost” to its proposal for pan-European pension funds and the adoption of the Pension Funds Directive. The EFRP has argued in favour of non-discriminatory tax treatment of foreign pension institutions.

Leonardo Sforza, head of research at Hewitt Associates in Brussels, also welcomed the Commission’s action.

“This is a further step in the right direction showing that the European Commission is using its power to abolish tax discrimination,” he said. “The Commission has a strong case.” He said it was good to see the Commission doing what the industry wanted.

The Commission said its action is in line with its policy of applying the 1958 Treaty of Rome's rules directly to tax discrimination against pension funds based in other member states.

"Tax discrimination against foreign pension funds is unacceptable," said internal market commissioner Frits Bolkestein.

"Workers should not be forced for tax reasons to take out new pension insurance when they take up a job in another member state and employers should be able to set up pan-European pension funds.

“Unless member states stop discriminating against foreign pension funds, we will not have a fully functioning internal market for occupational pensions even when the Pension Funds Directive is adopted."

The commission says the 1992 Bachmann case, where the European Court of Justice ruled in favour of the Belgian tax system, has now been overtaken by later ECJ judgements such as Wielockx, Safir and Danner. It says these later judgements “limit considerably” the scope for member states to apply different and more cumbersome tax rules to insurance/pension funds established in other EU countries.

The Commission has formally requested Denmark – in the form of a “reasoned opinion” to change its tax legislation and give pension contributions paid to pension funds located in other member states the same tax treatment as contributions to domestic funds.

A reasoned opinion is the second stage of the infringement procedure. Denmark has two months to provide a satisfactory response or face the ECJ.

The Commission has begun the first stage of the infringement process against the other countries, in the form of letters of formal notice.