Germany and Estonia received formal notices from the European Commission requesting information concerning different tax treatment of foreign pension funds on dividends and interest.

Both Germany and Estonia re offering domestic pension vehicles exemption - at least partly - from tax on dividends and interest while foreign funds have to pay the full tax.

"These letters of formal notice are part of a sustained action by the European Commission to eliminate discriminatory taxation of dividends paid to shareholders resident elsewhere in the EU and European Economic Area (EEA)," said EU taxation and customs commissioner László Kovács in a statement.

Similar letters were sent to the Czech Republic, Denmark, Spain, Lithuania, the Netherlands, Poland, Portugal, Slovenia, Sweden, Italy and Finland in spring and summer last year.

A first verdict in a case of tax discrimination of foreign pension assets was issued by the European Court of Justice (ECJ) against Denmark a year ago.

Last September the ECJ ruled against Belgium for taxing transfers of pension capital to pension funds elsewhere in the EEA, while such transfers within Belgium were tax exempt.

In Germany, Pensionskassen are subject to a reduced withholding tax on dividends paid by companies or they can get a partial refund on their tax payments.

While pension funds from other EU member states can benefit from similar exemptions, institutions in the EEA associated with the EU including Iceland, Norway and Liechtenstein have to pay the full tax.

In the case of Pensionsfonds, the dividends received are taxed on a net basis, which allows them to deduct any costs related to their investment.

All foreign pension vehicles are subject to a withholding tax on the gross dividend.

The same applies in the case of interest paid by German companies.

"It is completely unpredictable how the European Commission will decide in this case," said Klaus Stieferman, head of the German occupational pension fund association, aba.

"However, it is clear the German government does not want to pass any legislation which would be detrimental to the development of Pensionskassen and Pensionsfonds."

He added that losing this tax exemption would be a substantial financial burden for pension funds.

Stiefermann mentioned some people fear an ‘invasion' by foreign pension funds should these tax barriers fall.

"But there are still major hurdles with regards to social and labour laws for foreign players to offer funds in the German market," the aba head noted.

In Estonia, pension funds are completely exempt from tax on dividends received, while their foreign counterparts have to pay a withholding tax of 22%.

"If a member state levies a higher tax on dividends (or interest) paid to foreign pension funds this may dissuade these funds from investing in its companies," the EC explained.

It added such a discrimination "may thus result in a restriction of the free movement of capital as protected by Article 56 EC and Article 40 EEA" and "the Commission is not aware of any justification for such restrictions".

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