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The Danish Taxation of Pension Schemes Act incompatible with the Treaty

June 2007 - Employment. Legal Developments by Norrbom Vinding Law Firm, member of ius laboris.

More articles by this firm.

Judgment by the European Court of Justice (case C-150/04)

On 30 January 2007, the European Court of Justice (ECJ) delivered judgment in a case concerning the Danish Taxation of Pension Schemes Act and whether it conflicts with the freedoms guaranteed by the Treaty, i.e. freedom of movement for workers, freedom of establishment, freedom to provide services within the EU and free movement of capital.  

Under the Danish Taxation of Pension Schemes Act, tax deductions and tax exemptions are only available for payments under contracts with pension companies that are either established in Denmark or have a permanent establishment or a branch office in Denmark. Thus, payments under contracts with pension companies established in other Member States are not eligible for such relief. This distinction is a result of the Danish Government's wish to maintain the cohesion of the Danish tax system and the symmetry between deductibility of contributions and taxation of benefits.

Although conceding that the need to maintain such cohesion may justify differential treatment, the ECJ held that it did not justify refusing deductibility of pension contributions if less restrictive measures would have been as effective. In other words, the objective pursued must be proportional to the means by which it is pursued. This test was not satisfied, there being no direct connection between the deductibility of the individual taxpayer's contributions to a pension scheme and the taxation of benefits provided under the same pension scheme.

The most likely threat to the cohesion of the Danish tax system is if the taxpayer moves to another Member State after paying contributions into a pension scheme and before receiving the corresponding benefits - and not so much the fact that the pension company is established in another Member State.

The Danish Government had argued that the need to ensure the effectiveness of tax supervision and prevent tax avoidance makes the present tax system necessary as the Danish authorities are not necessarily able to verify whether foreign pension schemes meet the deductibility or exemption criteria since pension companies established in other Member States are not required to provide any information to the Danish tax authorities.

On this issue, the ECJ held that this need could also be safeguarded by means of less restrictive measures than by a refusal of deductibility.

On those grounds, the ECJ ruled that the Danish Taxation of Pension Schemes Act is incompatible with the provisions of the Treaty on freedom of movement of workers, freedom of establishment and freedom to provide services. Accordingly, the ECJ held that there was no need to consider whether the Danish Taxation of Pension Schemes Act is incompatible with the provisions of Treaty on free movement of capital.

The judgment illustrates:

  • that depending on the pension company's country of residence, the scope for differential treatment of pension schemes in national tax legislation is very limited, and
  • that the current Danish Taxation of Pension Schemes Act is incompatible with the Treaty and must therefore be amended.

 

Meanwhile, it is difficult to see how the Danish Government can comply with the judgment without allowing contributions to foreign pension schemes to be deductible.

Norrbom Vinding will follow developments in this matter - including any legislative initiatives.

For further information please contact: 

Karsten Holt

kho@norrbomvinding.com

T +45 35 25 39 40

www.norrbomvinding.com