SWEDEN – The European Court of Justice has rejected Sweden’s treatment of pension taxation in its final ruling in the so-called Skandia case – a move seen as helping to open Europe’s pension market.

The case was brought by Swedish life insurer Försäkringsaktiebolaget Skandia and its Swedish employee Ola Ramstedt. They took on the Swedish government over the right for employers to claim tax deductions for premiums toward occupational pension plans sold by life assurance companies domiciled in another EU country.

“The Court of Justice rejected the arguments put forward by the Swedish government to justify their tax rules,” the court said in a statement today.

"Certainly, we are happy that the European Court of Justice has ruled in our favour. This means that in time more players will be able to work full out in one and the same market," said Skandia’s general counsel Jan-Mikael Bexhed.

He added: "The decision is an important step toward an open European market for occupational pensions, even if there is still a long way to go before this is a reality."

Robin Ellison, pensions partner at UK-based law firm Pinsents, also welcomed the judgement. “It’s an additional piece of the jigsaw puzzle. It means that the pan-European pension is here.”

Ellision said the ECJ had made it clear that it rejects the “specious excuses” made by governments. He said the question now is how companies will enforce the judgement. He added that investment managers would have to do a lot of hard thinking about how it affects them.

The judgement means that Swedish law is now incompatible with European law. It is believed that Sweden will now have to change its law to comply with the ruling.

To begin with, Ramstedt and Skandia had applied for an advance ruling from Sweden’s Council for Advance Tax Rulings as to whether the insurance policy would be deemed to be pension insurance. The Swedish authorities had blocked the move.

An appeal was eventually taken to the ECJ. Now the court says that Swedish tax rules “restrict freedom to provide services”.

“Those rules are liable both to deter Swedish employers from taking out occupational pension insurance with institutions established in a member state other than Sweden and to deter those institutions from offering their services on the Swedish market,” the court says.

And it added that “there must be a direct connection between the deductibility of contributions and the liability to tax on sums payable by insurers in order for such a justification to be upheld”.

“There is no such correlation in the Swedish system, as there is no compensatory measure to offset the disadvantage suffered by an employer who chooses a foreign insurer compared with an employer who takes out comparable insurance with a Swedish company.”

It said that any tax advantage for providers of services resulting from low taxes in the member state of establishment “cannot be used by another member state to justify less favourable treatment in tax matters given to recipients of services established in the latter state”.

And it added that the need to preserve tax revenue is not sufficient grounds to justify a restriction on the freedom to provide services.

The new ruling follows previous ECJ pension judgements in the Danner and Bachmann cases.