EC tackles Portugal, Spain and UK over pensions

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  • EC tackles Portugal, Spain and UK over pensions

EUROPE - The European Commission has initiated action against the governments of Portugal, Spain and the United Kingdom for what it believes is a breach of EU rules concerning the terms applied to European pensions.

Statements issued by the EC last week said the EC has formally requested the UK amend legislation which "denies deductibility of pensions contributions paid to pension funds established outside the UK".

More specifically, the issue relates to the taxation of migrant workers with pension arrangements set up outside the UK, as the UK authorities only allow pension contributions to be deduced from income tax calculations providing the overseas authorities provides information on the date the pension is to start revealing what the capital value of the existing pension plan is.

Because UK rules are so strict on this matter, a foreign national may find they have to replace their overseas pensions with a UK-based scheme in order to be granted the tax benefits, noted the EC.

It has therefore started action against the UK as existing legislation is not compatible with Articles 39,.43 and 49 of the EC Treaty and Articles 28, 31 and 36 of the EEA Agreement.

However, Dave Roberts, senior consultant at Towers Perrin, said it was "highly unlikely that the UK will simply ‘roll over' on this" in part because "the costs to the UK Exchequer in relaxing its rules are unknown".

At the same time, the EC has also referred Spain and Portugal to the European Court of Justice (ECJ) for what it sees as discriminatory rules on overseas pension funds in relation to dividend or interest payments.

Spanish pension funds, for example, are exempt from paying tax on their income and can claim back withholding tax on the dividends they receive. Yet pension funds elsewhere are required to pay an 18% withholding tax on dividend payments.

Portugal also carries a 25% withholding tax on its dividends earned by overseas pension funds, making it potentially unattractive for foreign investors to hold Spanish or Portugese stock.

Officials say this amounts to the restriction of the free movement of capital, in contravention of Article 56 of the EC Treaty and Article 40 of the EEA.

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