DENMARK - Political parties have agreed a new framework for Danish pensions tax after the European Court of Justice overruled the continuation of the country's existing system.

The European Court of Justice ruled at the end of January Denmark was breaking European law on freedom of movement of workers and capital by not granting tax-deduction on contributions to pension contracts with foreign insurers.

So this proposed legislation will shift the tax burden from scheme investment returns to the individual, the Danish Tax Ministry has said.

Denmark's governing Liberal (Venstre) party, the Social Democrats, the Danish Peoples' Party (Dansk Folkeparti), the Radical Liberals (Det Radikale Venstre) and the Socialist People's Party (Socialistisk Folkeparti) have agreed the framework on future pensions taxation, the Tax Ministry said in a statement.

The proposed law will now be circulated for consideration, after which the parties will meet again to draw up the final version of the legislation.

Since the European Court had overruled Danish pension tax rules, Denmark was obliged to extend tax-deduction rights for pension contributions to those contributions paid into foreign schemes, the ministry said.

"As a result of this, Denmark also has to change the rules regarding the taxation of pension returns, since Denmark cannot tax foreign pensions instituted on their investment return," it said.

"Therefore, this tax has to be replaced by one on an individual level, so that in future, the individual pension holder will bear the tax obligation."

Political parties have agreed legislation will be implemented this autumn and deductions for foreign scheme contributions will take effect from 2008, the tax ministry said, while the switch in "PAL" (pension yield) taxation from the institutional to the individual level will take effect for Danish schemes from 2009.

Danish industry association Forsikring & Pension said once the tax regulations were in place it should be easier for foreign companies to establish themselves in the Danish pensions market while, at the same time, the Danish pensions industry is well equipped to compete with foreign pensions groups.

As well as making sure there continued to be a tax advantage in saving for a pension, the new tax rules will give the state the same level of tax income as current rules do, the association added.

"Foreign pension firms are welcome," said Carsten Andersen, deputy director of Forsikring & Pension.

"It is always positive for customers when new players come into the Danish market. But competition is already tough, and the Danish pension firms are fully able to match the foreign firms," he added.

It was not new competition from abroad that was the problem, he said, but rather the administrative upheaval the new legislation would bring.

"The problem is more that the proposed law will lead to huge administrative adjustments in the companies' IT systems, and there should be enough time to implement that," said Andersen.