Like other EU member states, Belgium's current pension laws are affected by the outcome of the Danner case. Elke Vandormael of Loyens explains.

• Facts of the Danner case
• Ruling of the Court
• Consequences for Belgian voluntary pension schemes

National tax rules have continuously hampered labour mobility in Europe. Many governments indeed fear the potential loss of significant tax revenue that harmonisation — through cross-border pension provisions — would bring.

On 3 October 2002, the European Court of Justice rendered an important ruling in the Danner case. This ruling was a break-through with respect to the deductibility of contributions paid to voluntary foreign pension schemes.

The Danner ruling brings us a step closer to harmonising taxation of pension schemes in Europe. The ruling obliges EU member states to give equal tax treatment to pension contributions made to pension schemes in other states compared to contributions made to local pension schemes.

Individuals should have the ability to invest their retirement savings in whichever member state they feel offers the most attractive financial opportunities. 

Mr Danner is a physician with German and Finnish nationality who worked in Germany before moving to Finland in 1977. While living in Finland, he continued to contribute to two German pension arrangements while also contributing to a pension plan in Finland. In 1996, his claim for an income tax deduction on the German pension contributions was denied.

Finnish tax legislation provides that contributions made to certain compulsory pension schemes, either national or foreign, are fully tax deductible. Contributions to voluntary pension insurance schemes, however, are under certain conditions and within certain limits only tax deductible if paid to a Finnish insurer. Similar contributions paid to a foreign insurance institution are not tax deductible.

Mr Danner pursued the matter before the Finnish courts, who then referred the case to the European Court to rule on EU law issues raised.

The Court ruled that Finnish tax provisions, which prohibit the deductibility of contributions paid to an insurance institution in another member state, while contributions to national insurance institutions are tax deductible, could be considered a violation of the fundamental freedom to provide services throughout the European Community.

Only in case the pension payments made by the foreign institutions would not be taxable in the hands of the beneficiary, national legislation can rightfully provide that the contributions made to foreign insurers are not tax deductible (cf. Bachmann case).

Awaiting a European directive with respect to pension provisions, the Court of Justice has taken a new step towards the harmonisation of the pension provisions in Europe.

What are the implications of the Danner case for an EU national who is considering moving to Belgium and who is contributing to a pension scheme in their home country? Can we transpose the Danner ruling to the Belgian tax legislation?

According to Belgian tax legislation, contributions to voluntary pension schemes are only tax deductible if paid to a Belgian institution.

This issue was already discussed in the Bachmann case, but only with respect to individual insurances. In this case it was ruled that the fundamental freedoms as provided for in the EU-Treaty can be restricted if the measures take aim at ensuring the coherence of a tax system of a member state.

This requires a direct link between a certain tax advantage (eg tax deductibility of pension contributions) and a certain tax disadvantage (eg taxation of pension payments made by the insurer).

The Court of Justice has perceived such a direct link with respect to individual insurance, since the non-tax deductibility of the pension contributions is compensated by the tax exemption of the pension payments made by the insurer.

The Danner case confirms the Bachmann case with respect to individual insurance, but reviews the provisions with respect to collective insurance.

Under the present legislation, contributions for collective insurance are not tax deductible if paid to a foreign insurer. Further, the pension payments made by the insurer are taxable in the hands of the taxpayer. Since no tax advantage is given to persons who contribute to a foreign pension scheme, there is no direct link, as described above, with respect to collective insurance.

An exception was unilaterally made, however, under the Belgian administrative circulars of 1975 and 1978 for Dutch, French and Luxembourg nationals who are Belgian residents and contribute to a collective voluntary pension scheme (collective insurance) in their home country. These administrative circulars are now confirmed by the Danner ruling and extended to a broad European level to all EU-nationals who are residing in Belgium.

Therefore, following the Danner case, it should be recommended that Belgium modifies her legislation with respect to cross-border collective pension schemes, before it is penalised by the European Commission for violating EU legislation.

January 2003

Elke Vandormael is an Attorney-at-Law with Loyens in Belgium.