PAN-EUROPEAN PENSIONS SPECIAL – The European Commission has called for member states to look closely at moving to a harmonised EET (exempt contributions, exempt capital gains, taxed benefits) system for pensions taxation, saying that it would “broadly welcome” its greater acceptance amongst member states.

However, the Commission says it does not envisage proposing legislation to harmonise member state pension taxation systems.

In today’s communication on tax for supplementary pensions, the Commission addressed the ‘double taxation’ issue, whereby employees moving across EU borders can either be taxed twice or not at all on their pensions, depending on the member states they move between.
This results from the different pensions taxation systems applied, whether they be EET, TEE or ETT.

In its communication the Commission says it believes it is probably easiest for member states to strive for alignment of taxation on the basis of the EET principle.
Eleven member states already employ the EET system, while Denmark, Sweden and Italy use the ETT system and Germany and Luxembourg have the TEE system.

The Commission adds: “ Moreover, by providing for a tax deferral on the contributions paid, the EET system encourages the making of retirement provision. The EET system also helps to cope with demographic ageing as it reduces revenues today in exchange for higher tax revenues at the time when the demographic dependency ratio will be much more unfavourable.”

Nonetheless, the EC also notes that a broad acceptance of the EET principle in itself would not lead to homogeneity, noting the significant differences existing between EET type member states in how far they deduct tax from contributions.

The Commission also suggests a number of practical measures to over come the problem of double taxation for an employee starting their career in a TEE state and finishing it in an EET state.
The communication notes that some states such as Denmark and Sweden have already moved to eliminate this problem by exempting benefits paid by foreign pension institutions to their residents, to the extent that the contributions were not deductible.

Double tax treaties – where if a worker from at TEE state retired to an EET state the latter would not tax his pension - just as it would have been exempt in the state of origin, are another solution to the problem, the Commission adds.