Controversy between European freedoms and fiscal autonomy

Taxation is a national competence.[1] This means that EU Member States are, in principle, autonomous in the field of tax legislation and it simply cannot be harmonised or regulated at EU level. At the same time, the European freedoms do of course 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 reluctant with regard to both pension and tax policy. And in doing so, the free movement of pensions. The Netherlands does not want to miss out on 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 additional obligations. Furthermore, participants who wish to take their pension entitlements with them when moving abroad may be confronted with a tax settlement. This can amount to a high sum and that is not considered in line with the European free movement of persons and capital. For an explanation of the legal obligations and tax consequences I refer to the background information below.

The Netherlands rejects EU interference

The EC has already taken several actions to remove restrictive tax rules on cross-border pension administration and transfers in order to strengthen the internal market. In the case of the Netherlands, for example, the EC started an infringement process earlier in 2012[3] , and now has a follow-up in the infringement package of November 2019. With regard to the provision that the redemption options may not be wider, the EC has also sent an advice in the infringement package of July 2018 on the threat of a lawsuit at the ECJ EU.[4]

So, emotions may be running high, but the Dutch cabinet argues to be fully compliant with EU law and emphasizes that the conditions that apply to an untaxed cross-border value transfer do not infringe European freedoms. Furthermore, any possible interference by Europe in both taxation and pensions is strictly rejected.

Facilitating and taxing the link between pension savings

Almost all Member States facilitate retirement savings in some way through taxation. The facilitation happens in the three tax moments of pension savings: the contribution, the achievement of returns and the pension benefit. The most common is the so-called EET facilitation, where tax deductions are made for the contribution (1st E, Exempt), the returns achieved are exempt from taxation at the pension provider (2nd E, Exempt) and the pension benefit is taxed (3rd T, Taxed). In the Netherlands this is referred to as the reversal scheme. The government can provide such a tax facilitation for the premium contribution, because it knows that the levy will come in the future.

If the value of the pension is transferred across borders, this future taxation will be jeopardised. In that case, the question of which country may levy tax depends on the tax treaty for the avoidance of double taxation that has been concluded. The OECD Model Tax Convention, which is generally followed, assigns tax law in most cases to the state of residence, i.e. the country where a person has moved to. For the Netherlands this means that although it facilitated pension accrual for tax purposes in the Netherlands at the time, it is not allowed to levy tax on the final pension benefits. This is the recipe for the Dutch government's reluctance to allow cross-border value transfers without any consequences for taxes.

What's next?

A certain tension is noticeable between, on the one hand, the pursuit of a European internal market and its freedoms and, on the other hand, fiscal autonomy and the preservation of tax rights on pensions and their tax facilitation. Cross-border pensions, their administration and taxation have been the subject of a long period of struggle and discussion.   
With regard to the cross-border value transfer, a procedure by the EC before the ECJ EU is not excluded by the Cabinet, because previous EC opinions have thus been ignored. Such a procedure will ultimately have to determine whether or not the Dutch tax conditions for cross-border value transfers are contrary to EU law. It is still up to the EC to actually start such a procedure. A peculiar fact is that in the same Infringements Package of November 2019, the EC asked Portugal to abolish the discriminatory tax on imported used cars and referred this to the European Court of Justice in February 2020.
[5]

Background information: Dutch regime on cross-border value transfer

A distinction should be made between the civil conditions in the Pensions Act and the tax conditions in the Wage Tax Act 1964, the two relevant laws for a tax-free cross-border transfer of value.[6]

Civil conditions

Cross-border value transfer, as imposed by the European IORP Directive[7], is regulated in the Pensions Act (PW). On request, the pension can be transferred to a foreign pension provider. In addition to the same procedural requirements for Dutch pension providers, there is also the additional requirement that the possibilities to buyout the pension after the value transfer may not be more extensive than on the basis of the PW. However, the PW has a total ban on buyouts (with a few minor exceptions.[8] As a result, there is very little room for manoeuvre in civil law for other Member States with regard to surrender. Given this fact, this additional requirement may have a restrictive effect on cross-border value transfer of pensions.

Fiscal conditions

Value transfer (also abroad) is in principle seen as buyoff of the pension. According to both the Pensions Act and the Wage Tax Act 1964 this is not allowed, which in principle leads to direct taxation on the value and collection of 20% revision interest. All this can amount to 71.75% at the top rate.
However, and fortunately, there is an exception to this rule if the transfer takes place to a (fiscally) recognised pension provider and the conditions of the PW with regard to value transfer are also met. In the national perspective, this is quickly the case, but in the international perspective it becomes more difficult. A foreign pension provider must be appointed by the Minister. To this end, the foreign pension provider must devote itself to additional information provisions and act as guarantor for the collection of the tax owed. Secondly, the EC notes that foreign pension providers have to provide security to the Dutch authorities, for example a business 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 must 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. As a result, only 17 pension funds and 3 life insurers have been appointed.[9] This may hinder cross-border value transfer of pensions from a tax point of view. 
Reference should also be made to the civil conditions, which concluded that other Member States soon have wider surrender possibilities and that this cross-border value transfer can also be fiscally difficult.

Dan dient nog verwezen te worden naar de civiele voorwaarden, waarin geconcludeerd is dat andere lidstaten al snel ruimere afkoopmogelijkheden kennen en dit grensoverschrijdende waardeoverdracht tevens fiscaal kan bemoeilijken.

By: Pim Mertens
Scientific coordinator at ITEM: Institute for Transnational and Euregional cross border cooperation and Mobility

Cross-border pension is increasingly being researched scientifically, such as the research started in 2019 by ITEM / UHasselt PhD researcher Stefan Bemelmans into “A comparative law pension research between the Netherlands and Belgium concerning the obstacles in cross-border pension administration of foreign pension schemes”