EUROPE - The European Commission has taken its first steps towards action against the Italian and Finnish governments for imposing higher dividend taxes on overseas pension funds.

A statement issued by the EC said letters of formal notice have been sent to Italy and Finland requesting information to explain the rules which tax foreign pension fund dividends at a higher rate than domestic fund dividends.

More specifically, the EC notes domestic pension funds pay some tax on their dividends but the withholding tax on outbound dividends appears to be higher, suggesting overseas pension funds may be dissuaded from investing in either Italy or Finland and companies could subsequently find it difficult to attract investors from overseas because pension funds are not eligible for a refund.

This is not the first such cross-border tax action the EC has taken, as it issued letters to a further nine countries in May (see earlier IPE story in May) stating it views this as a restriction on the free movement of capital and it had referred the matter to the European Court of Justice.

The EC is still investigating whether to take action against other countries after the European Federation of Retirement Provision (EFRP) lodged complaints with the European Commission in December 2005 against 18 EU members states for infringements concerning dividend and interest taxation.

This latest action follows a ruling by the ECJ against Denmark for placing higher dividend tax on overseas pension funds.