Tax and pan-European pensions

A big barrier to pan-European pensions - taxation - is being lifted, according to the European Commission’s (EC) Peter Schonewille.

Speaking at Multi Pensions 2006 in Amsterdam, Schonewille said that cross-border tax deductions for contributions paid to pension funds in other member states no longer presented an obstacle in 20-22 EU member states. He said pan-European funds could now receive contributions from all member states without tax discrimination, with the exception of Belgium, Denmark and Sweden, where infringement cases are taking place, while the situation in Cyprus and Slovakia is still unclear. Belgium and Denmark are moving to end the infringements, resistance in Sweden, however, remains stiff. Sweden allows tax deduction only once the pension out-payment is gone at a much later stage, which is different to their treatment of domestic pension funds.

But Schonewille, administrator at the EC’s tax infringement unit, said that pension capital transfer taxation was still an important obstacle, inbound as well as outbound. He explained that multinationals would want to centralise pension capital in pan-European funds, which can be the preferred solution for a mobile worker. A tax on inbound pension capital transfer deters pan-European pension funds from establishing themselves in that territory. And it is still unclear as to whether this applies to both mobile and non-mobile workers. It may be an unjustified restriction, especially if the member states have an EET taxation system - new member states have mostly adopted the EET taxation system, while Poland and Hungary without a second pillar are following the TEE taxation system - and will lead to double taxation.

An infringement of outbound restrictions takes place in case of a mobile worker where a domestic tax free transfer is possible, residence taxation is contained in the tax treaty, both states are EET and the outbound transfer is taxed.

However, some member states already allow cross border transfers without taxation. The ruling in the Belgian case, where advocate-General Stix-Hackl opined against taxation of outbound transfers, may help convince other member states to follow suit.

Another issue is the tax exemption on interest and dividends for domestic pension funds in EET and TEE states, while foreign pension funds are discriminated against through a withholding tax on interest and dividend payments. Since January 2006, the EC have received formal complaints on 17 member states regarding this.

The EC is now to decide on the opening of infringement procedures. The Netherlands, however, have already repaired this infringement. In real estate income, infringement is also possible, as pension fund income from real estate such as rent and capital gains is exempt in EET states, but member states do not to include foreign funds in the exemption. Since 6 April 2006 however, pension funds in other EEA states can register in the UK and get tax exemption for real estate income.

The EC is currently active in pursuing pension taxation infringement cases on investments and transfers of pension capital. Nevertheless, some industry experts remain convinced that it is very difficult to harmonise the various benefit systems, unlike the investment side, of member states.

Robeco’s CEO George Möller added that to make pension funds more internationally competitive, the European Pensions Directive would have to overcome challenges such as the full funding requirement of cross-border schemes, different tax, social and labour laws of member states, mutual recognition, the application of ring-fencing as well as different legislation on privacy and data retention as well as language issues.

Multi Pensions 2006 also cast an eye on the pension scene of 2007. Pragma Consulting’s managing director Koen de Ryck predicts the role of governments, the private sector and the individual will be hot on the agenda in the next year. He also expects encouragement of employers’ risk-taking, the avoidance of over-regulation, the role of the EU and member states in pension provision, as well as the improvement of asset management, to be in the limelight.

No answer has yet been found as to where the best place for a pan-European pension fund is. Asset pooling structures are already in place in most countries, but several of them also prepare themselves for a future of pan-European pension plans. Belgium has created a flexible, prudential framework for asset pooling and pan-European pensions. A separate legal entity with zero taxation on investments and a supervisory authority have been established that benefit from the double tax treaty. The upgrading of the FGR, Funds for Joint Account, the transparent asset pooling vehicle in the Netherlands, has improved its suitability for cross border pension pooling. Essential ring fencing of schemes within IORP is allowed under Dutch law and the country is working on a solution to match the IORP more closely with the Dutch market. The Netherlands’ open dialogue, size and expertise would also help pan-European pensions despite the country’s strict funding requirements. Ireland was one of the first countries to adopt the IORP directive and set up the common contractual fund (CCF) as an asset pooling vehicle. Its open door policy and financial market structures would help to set up pan-European pension plans in the country. Luxembourg’s Fonds Commun de Placement (FCP) has become more popular as a pension fund pooling vehicle since the tax on investment funds was dropped a few years ago. Luxembourg’s multi-linguism and experience as Europe’s largest centre for cross border activities advocate it to pan-European pension plans. And the UK’s clear and favourable taxation system and compliance with regulations support asset pooling and pan-European pension plans.

Pensplan managing director Michael Atzwanger demonstrated at the example of the Italian open pension fund ‘Pensplan Profi’ that successful cross-border activities already take place and can provide a second pillar for their regions. He believes that taxation and language barriers can be easily removed when pension plans span only over a small region.