GERMANY – The European Court of Justice (ECJ) has dismissed charges against Germany, brought forward by the European Commission, regarding taxes paid by pension funds on dividends.

The court ruled that the Commission failed to provide sufficient evidence that the current tax situation had unfairly penalised foreign pension funds.

Under German law, domestic Pensionskassen are favoured in tax terms by local authorities, as they can receive a partial refund of the withholding tax by claiming expenses related to equity investments, while foreign funds cannot.

The case had been brought forward to the ECJ in December 2010, and Germany was supported by France, the Netherlands, Finland, Sweden and the UK, some of which have been through similar proceedings.

In its verdict, the ECJ concluded that the European Commission produced insufficient evidence that the taxation differences had hindered foreign pension funds' investments.

It added there was no proof that costs such as bank fees or transaction costs, which the Commission claimed should be tax deductible, were linked directly to generating dividend income specific to Germany for the foreign pension fund.

Given that foreign pension funds might not have any costs that can be tax deductible under the provisions for dividend taxation, the court dismissed the Commission's case.

"The case is not sufficiently proven legally, if the Commission cannot present a plausible example for a situation in which this member state is actually treating foreign pension funds unfavourably," the court said.

In 2008, when the commission issued its second warning note to Germany on the subject, Klaus Stiefermann, managing director of the German pension fund association aba, told IPE that losing this tax exemption would be a "substantial financial burden" for German pension funds.