Last November, the European Commission (EC) sent the Netherlands an opinion stating that the Netherlands should change its tax rules. This is because the current rules prevent pensions accrued in the Netherlands from being taken with you when you move abroad. The so-called cross-border transfer of pension value exposes the debate between European freedoms and fiscal autonomy. This is because the cabinet rejects European interference in taxation and pensions, while by doing so it makes EU freedom of movement more difficult. As a result, the cabinet now runs the risk of the EC taking a case to the European Court of Justice. You can read how it got this far in this blog.
Tug of war between European freedoms and fiscal autonomy
Taxation is a national competence,[1] meaning that EU member states are autonomous in terms of tax legislation. So this legislation cannot simply be harmonised or regulated at EU level. At the same time, of course, European freedoms remain valid and must be safeguarded: the free movement of citizens and workers, the freedom of establishment, the freedom to provide services and the free movement of capital. [2]
However, the Netherlands is cautious about both pension- and tax policy when it comes to free movement across borders. This is because the Netherlands does not want to lose tax revenue because pensions are paid out in another country. Moreover, it is made more difficult for foreign pension providers to operate in the Netherlands because of all kinds of additional obligations. Furthermore, members who wish to take their pension entitlements with them when moving abroad, may face a tax settlement. This can be quite high and is not considered in line with the European free movement of persons and capital. For an explanation of the legal obligations and tax implications , please refer to the background information at the bottom.
Netherlands rejects EU interference
The EC has already taken several actions to remove restrictive tax rules on cross-border pension provision and transfers to strengthen the single market. For instance, in the case of the Netherlands, an infringement case[3] was previously launched by the EC in 2012, with a follow-up now in the November 2019 infringement package. Regarding the provision that the surrender options should not be wider, the EC also sent an opinion in the July 2018 infringement package on threatening to sue the ECJ. [4]
So while tempers may run high, the Dutch government argues that it is fully compliant with EU law and stresses that the conditions applicable to untaxed cross-border value transfer do not infringe on European freedoms. Furthermore, it strictly rejects any possible interference by Europe in both taxation and pensions.
The connection between pension and tax
Almost all member states facilitate pension savings in some way through taxation. The facilitation can take place at the three tax moments of retirement savings: the contribution contribution, the earning of returns and the retirement benefit. The most common way is the so-called EET facilitation, in which tax deduction is granted for the premium contribution (1st E, Exempt), the returns achieved are exempted from taxation at the pension provider (2nd E, Exempt) and the pension benefit is taxed (3rd T, Taxed). In the Netherlands, this is called the reversal scheme. The government can grant such a tax deduction of the premium contribution, because taxation when the pension is paid out in the future still follows.
In case of a cross-border value transfer of the pension, this future taxation of the pension benefit is jeopardised. This is because then the question of which country can tax the pension benefit depends on the Tax Treaty concluded. Tax treaties are concluded to avoid double taxation. The OECD Model Tax Convention usually followed in tax treaties assigns the right of taxation in most cases to the state of residence, i.e. the country to which a person has moved. For the Netherlands, this means that although it facilitated pension accrual in the Netherlands for tax purposes at the time, it is not allowed to levy on the eventual pension payments. In doing so, it misses out on revenue. There, then, is the recipe for the Dutch government’s reluctance to allow cross-border value transfers to be tax-free.
How to proceed?
So there is a certain tension between the pursuit of a European single market and its freedoms, on the one hand, and tax autonomy and the preservation of taxing rights over pensions and its tax facilitation, on the other. Cross-border pensions, their implementation and taxation have been a long-running battle and debate.
Regarding the cross-border value transfer, a procedure by the EC at the ECJ EU is not ruled out by the government, as previous EC opinions have thus been ignored. Such a process will ultimately have to reveal whether or not the Dutch tax conditions for cross-border value transfer violate EU law. It is still up to the EC to actually start such a procedure. In any case, piquant fact here is that in the same November 2019 infringement package, the EC asked Portugal to lift the discriminatory tax on imported used cars and took it to the European Court of Justice in February 2020. [5]
Background information: Dutch regulation on cross-border value transfer
A distinction needs to be made between the civil conditions in the Pensions Act and the tax conditions in the Payroll Tax Act 1964, the two relevant laws for a tax-free cross-border value transfer.[6]
Civil conditions
Cross-border value transfer, as also imposed by the European IORP Directive[7], is regulated by the Pensions Act (PW). Pension can be transferred to a foreign pension provider upon request. Here, in addition to the same procedural requirements for Dutch pension provider, there is the additional requirement that the options for buying off the pension after the value transfer may not be wider than on the basis of the PW. However, the PW has a total ban on commutation (with some minor exceptions),[8] so this leaves very little leeway in civil law for other member states with regard to commutation. Given this fact, this additional requirement can be restrictive for cross-border value transfer of pensions.
Tax conditions
Value transfer (including to a foreign country) is, in principle, seen as commutation of the pension. This is not allowed under both the Pensions Act and the 1964 Payroll Tax Act, which leads to direct taxation in principle on the value and collection of 20% revision interest. All this can add up to 71.75% with the top rate.
However, there is, and fortunately, an exception to this rule if the transfer is made to a (fiscally) recognised pension administrator and the conditions of the PW regarding value transfer are otherwise met. In the national perspective, this is quickly the case but in the international perspective it becomes trickier. Indeed, a foreign pension administrator has to be designated by the minister. For this, the foreign pension provider must commit to additional information provisions and act as a guarantor for the collection of the tax due. Secondly, the EC also notes that foreign pension providers must lodge security with the Dutch authorities, such as a collateral or a bank guarantee, if they transfer pension capital to a foreign pension provider or if they want to offer services on the Dutch market. Thirdly, (former) employees have to provide security if their pension capital is transferred to a foreign pension provider or if they want to purchase pension services from a foreign pension provider. The result is that only 17 pension funds and three life insurers have been designated,[9] which may start to hamper cross-border value transfer of pensions for tax purposes.
Reference should then still be made to the civil conditions, where it has been concluded that other member states soon have wider surrender options and this can also make cross-border value transfer tax difficult.
By: Pim Mertens
Scientific coordinator at ITEM: Institute for Transnational and Euregional cross border cooperation and Mobility