EUROPE - The European Commission has stepped up its action against German authorities to remove discriminatory legislation concerning dividend tax paid by overseas pensions institutions.

A statement issued by the EC said it has now sent a formal request to Germany to amend its rules concerning dividend payments to German Pensionskassen and Pensionsfonds, as these vehicles have advantageous tax terms in relation to dividends compared with their foreign counterparts.

The Commission has sent a ‘reasoned opinion', which is the second step of any EC law infringement proceedings, demanding German authorities explain themselves within two months or risk the matter being referred to the European Courts of Justice (ECJ).

Germany Pensionskassen are favoured in tax terms by local authorities as they can receive a partial refund of the withholding tax imposed, while foreign funds cannot.

Pensionsfonds are slightly different again as they are instead taxed on a net basis and pay a 15% corporate tax rate compared with the 25% withholding tax paid by overseas institutions. This strategy has tended to be applied by countries elsewhere.

Germany was first targeted by the EC in February 2008 over this issue, but it is not alone as the European Commission has been pursuing most EU member states individually for over the two years now, to try and resolve discrepancies between the dividend tax and withholding tax rates charges to overseas pension funds and local investors. (See earlier IPE story: EU issues new warnings over tax discrimination)

Its first successful dividend-related prosecution through the ECJ was in November 2007 when the Dutch government was ordered to repay withholding tax charged to foreign pension funds on the dividend payments owed. (See earlier IPE stories: ECJ backs fresh claim on withholding tax and Pension funds set to receive €500m in Dutch tax rebate)

Since then, the French supreme court announced in February this year that the French tax authorities would be required to reimburse foreign pension funds any such charges. (See earlier IPE story: French supreme court acts on pensions rebates)

And the Danish and Finnish governments were warned only recently that they would need to change their legislation to remove any discrimination favouring local pension funds in the payment of dividend tax. (See earlier IPE story: EC takes action against Italy, Denmark and Finland)

In a separate action, Estonia has now been referred to the ECJ by the EC under Article 39 of the EC Treaty concerning the free movement of workers, as Estonia requires low-income non-residents to pay a higher rate of tax on pensions paid compared with low-income residents.

Any non-resident pensioner whose global income is no more than EEK63,000 (€4,026) has to pay tax on the money received if 75% of their global taxable income was not earned in Estonia.

The EC said" "Estonia should calculate the tax amount due in Estonia, taking into account the totality of his income, and also make the same personal deductions available to residents and non-resident taxpayers."

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