Building on the Danner case, the European Court of Justice has ruled that a Sweidsh insurance company violated the free movement of services. Kathleen Billen and Wim De Buyser of Loyens explain.

• The decision

The European Court of Justice previously ruled that the free movement of services is violated when pension contributions paid to a foreign insurer are not deductible, while such contributions paid to a domestic insurer are deductible.

In a new decision, the Court rules that the free movement of services is also violated when an employer’s contribution to a foreign pension insurer is deductible but only at a later stage, while an employer’s contribution to a domestic pension insurer is immediately deductible (E.C.J. 26 June 2003, case no C-422/01 re Skandia/Ramstedt).

This decision confirms once more that the Belgian regulation, which deems contributions paid to non-Belgian insurance companies as non-deductible, is (at least partially) incompatible with the free movement of services.

Swedish legislation

The Court decision acts on Swedish legislation. Swedish legislation distinguishes between pension insurance and endowment insurance in respect of complementary pension insurances that an employer subscribes to for the benefit of an employee.

Unless strict conditions have been fulfilled, in principle only an insurance taken out with an insurer established in Sweden can be considered pension insurance.

This distinction has the following fiscal consequences:

• The premiums an employer pays for pension insurance are immediately deductible. Retirement benefits subsequently paid out are subject to tax in the hands of the insured beneficiary.
• The premiums the employer pays for endowment insurance are only deductible at the time the pension is effectively paid to the employee. Retirement benefits paid out at a later date are considered as professional income for the employee.

This different treatment regarding the deductibility of the premiums, according to whether or not they are paid to a Swedish insurance company, has been referred to the Court for a preliminary ruling.

The motive was the refusal of the Swedish tax authorities to immediately deduct the premiums that a Swedish company (Skandia) paid for one of its employees (Ramstedt) for a supplementary pension insurance taken out with a non-Swedish insurer.

Freedom to provide services

The Court ruled that the Swedish law restricts the freedom to provide services (cf Art. 49 EC-Treaty).

On the one hand, Swedish employers are restrained from taking out a supplementary pension with an insurance company established in another EU member state; on the other hand, non-Swedish insurance companies are restrained from offering their services in Sweden.

Grounds of justification

The Swedish government provides four grounds to justify the restriction on the freedom to provide services: the need for fiscal cohesion in the Swedish tax system, the effectiveness of fiscal controls, preservation of the Swedish tax base, and competitive neutrality.

Fiscal cohesion

The Swedish and Danish governments refer to the Bachmann case to justify the need to maintain cohesion in the tax system (see also the Commission/Belgium case). There would be a direct connection between the deductibility of the premium and the taxability of the pension (like in the Bachmann case).

The fact the deduction and the taxation in casu are not claimed and paid respectively by the same taxpayer is no objection, according to the Swedish government.

Employer contributions are “in fact a part of the wages of the employee”. The fiscal advantages and disadvantages of the pension insurance therefore only affect the beneficial employee and not the employer. That the contributions are in casu paid by the employer and not the employee, is therefore “merely a technicality”.

The Court rejects this argument. It sees no correlation between the deduction and taxation as in the Bachmann case. An employer that takes out insurance with a non- Swedish insurer will have to wait until effective payment of the pension before he can claim a tax deduction. He will not receive compensation for the financial disadvantage he faces compared to an employer who has a similar insurance with a Swedish insurance company and who can deduct the paid contributions immediately.

The fact that the contributions will be part of the wages of the employee does not, according to the Court, justify the distinction in deductibility according to whether the premium is paid to a Swedish or a non-Swedish insurer.

Effectiveness of financial control

Under the second ground, the Swedish and Danish authorities call for the need for a sufficient and effective fiscal control.

They argue that the existing community instruments, especially the European Directive 77/799/EEC of 19 December 1977, would be insufficient. (see Fisc. Int. no 198, p. 4 for this directive).

According to the Danish government, a fiscal control can only be effectively implemented if the member states have the explicit right to require a foreign insurance company to provide information on payments made.

The Court rejects this argument and determines that a member state can request, relying on the Directive 77/799, another member state to supply all necessary information to ascertain the correct amount of income tax.

A member state can therefore always trace whether a tax payer has effectively paid his premiums to an insurance company established in another state and can request the necessary documentary proof from the relevant taxpayer.

The need to preserve the tax base

The Swedish government states that the requirement that the pension insurer be established in Sweden is justified by the risk that taxable property may disappear.

According to the Danish government the Court in the Safir case judged that the protection of the tax base was a public interest requirement that could justify even indirectly discriminatory tax rules, (E.C.J. 28 April 1998 re Safir, Fiscoloog no 660, p.5).

If the right to deduct premiums paid for foreign pension insurances would not be limited, taxpayers residing in member states where taxation is high would be encouraged to take out pension insurances in member states not only where the taxation on pension benefits is lower, but also where under the double taxation treaty concluded with the beneficiary’s resident country withholding tax is deducted at source.

This could force member states to lower their level of taxation, which would destroy the basis of the economy of welfare states.

The Court also rejected this ground, referring to the Safir and Danner cases.

A possible tax advantage resulting for providers from the lower taxation in the member state in which they are established does not give another member state the right to treat the recipient of the services established in that other member state less favourably. Furthermore, the need to prevent the reduction of tax revenue is not a justifiable ground.

Competitive neutrality

The Swedish government states that in Sweden the neutrality between the different forms of management of pension capital would be threatened without limitations on the deductibility.

Swedish insurance companies that set up branches abroad and foreign insurance companies would enjoy unjustified competitive advantages compared with other forms of management of pension capital and compared with pension insurance companies under Swedish law.

The Court also rejects this line of argument, which is difficult to follow. Equality of competition between different national forms of management of pension capital could not be upheld at the cost of restricting the free movement of services.

The Court's decision follows:

Article 49 of the EC Treaty [right to freedom of services] precludes an insurance policy issued by an insurance company established in another member state which meets the conditions laid down in national law for occupational pension insurance, apart from the condition that the policy must be issued by an insurance company operating in the national territory, from being treated differently in terms of taxation, with income tax effect which, depending on the circumstances in the individual case, may be less favourable.

With this decision, the court goes a step further than the already mentioned Danner case on the non-deductibility of premiums paid to insurance companies established in other member states, compared to the deductibility of premiums paid to domestic insurers.

In the new decision, the premiums paid for insurances concluded with foreign insurance companies are not deductible at the moment of payment. On the other hand, the right of deduction occurs at the moment the pension is paid out.

This regulation can be less beneficial in certain cases. The court finds this sufficient to conclude there is a limitation of the free movement of services.

The Skandia/Ramstedt case goes a step further than the Danner case — it is not required that there is no deduction at all for premiums paid to a foreign insurance company in order to be considered as a violation of the free movement of services.

For the Court, the fact there is a different moment of deductibility for premiums paid to foreign insurance companies than those paid to domestic insurance companies is sufficient. That this can be as well advantageous as disadvantageous for the taxpayer is of no importance to the Court.

Relevance for Belgian jurisdiction

Under the Belgian tax system (and this will remain the case under the new legislation) premiums paid to foreign insurance companies are not deductible for the employer (Art. 59 W.I.B. 1992).

Contrary to Sweden, Belgium does not provide the possibility to deduct the pension cost at the time of payment of the pension. The Belgian law is therefore even less beneficial for premiums paid to foreign insurance companies than the Swedish legislation.

The Skandia/Ramstedt decision consequently confirms a fortiori that the Belgian regulation is incompatible with the European norm.

Where Belgium was deemed right in the Bachmann case, after the Danner-decision Belgian regulation with respect to deductibility premiums paid to non-Belgian insurance companies cannot be maintained as such.

Nevertheless, Belgium chose to approve the new act on supplementary pensions without taking into account existing European regulation.

It should also be noted in this respect that the European Commission has decided to take Denmark to the European Court of Justice and to start infringement procedures against the UK and Ireland.

Furthermore, the Commission said it was sending letters of formal notice to a.o. Belgium over pension tax discrimination, which is the first stage of the formal infringement process.

Taking into account the Commission’s determination to stamp out tax discrimination against foreign pension funds, it really is time for Belgium to adapt its legislation to EU law.

July 2003

Kathleen Billen and Wim De Buyser are attorneys-at-law with Loyens in Brussels.