UK: Pan-European Pension Test Case

Last Updated: 30 December 1998

A pan-European pension test case is being planned by the founder members of PEPA (Pan European Pension Association). Kvaerner, the Anglo-Norwegian engineering group, Zeneca, the UK based pharmaceutical company and the British law firm, Eversheds, aim to use a worker based in another Member State, as a guinea pig to request tax relief on contributions made to his home pension scheme. Member States' tax regimes do not allow tax breaks for pension contributions made to another Member State's pension fund. For multi-national companies with employees across Europe, a cross-border fund would cut costs and provide greater security and mobility for their employees.

PEPA had its first meeting at the end of June in London and held a second meeting on 12 October 1998 in Brussels. The aim of the meeting was to increase the membership and make the association more European. The panel stated that PEPA was not an anti-tax or anti-government organisation, but just a group of people with a common interest in establishing a pan-European pension fund. PEPA said that it required 25-50 interested parties to contribute £12,000 each to achieve financial viability and credibility. The attendees included French, German, Belgian, and Dutch representatives of multi-national companies, who kept asking for clarification of PEPA's objectives, before handing over the initial instalment of £6000 for PEPA's fighting fund.

The Legal Arguments

The main thrust of the presentations was about a hypothetical test case, but there were no details of the case that PEPA had chosen to take forward; which legal procedure they had decided to follow; or in which country the test case would be launched. The legal arguments, presented by Harold Lewis of Eversheds, centred on establishing that the proposed test case did not threaten the coherence and integrity of the Member State's tax system and that the individual's freedom of movement was being threatened due to restrictive tax regimes. It was felt that prospects of success were good, as recent judgements in Schumacker1 and Wielockx2 have found that European citizens should be treated equally under their host country's fiscal regimes, to ensure that their mobility is not hindered.

Another strand that may be followed in a test case is to ensure freedom of establishment for the setting up of a pan-European fund. The judgement this summer, in the corporate tax case, ICI v. Colmer3, found against HM Inspector of Taxes, who had prohibited ICI from claiming tax relief on losses from other subsidiaries based both inside and outside the EU. This was deemed to be contrary to Article 52 of the Treaty, which deals with the freedom of establishment. This was a theme pursued in Safir4, where it was found that the fiscal and compliance requirements placed on an individual paying premiums on a life policy to a firm based outside the host country were contrary to Article 52.

1 Case C-279/93
2 Case C-80/94
3 Case C-264/96
4 Case C-118/96 

Timetable for a European Court Test Case

The time estimate given by PEPA for a test case is an optimistic 2-3 years. If the appeal is not allowed immediately, a series of appeal hearings will be made through the national court structure, with requests for a referral to the ECJ at each stage. This could add at least 3 years to the process.

The timetable:

As a test case, tax relief will be claimed for contributions to a foreign pension scheme; 3-6 months;

  • The national tax authority is likely to reject the claim for tax relief; 3-6 months;
  • The case will be referred to the first point of appeal under the national tax regime; and a request will be made for an immediate referral to the European Court of Justice (ECJ);
  • If the appeal is allowed there will be a brief oral hearing; 12 months
  • The Advocate General gives an opinion; 6 months
  • The ECJ announces its decision; 6 months

Is there Another Way?

The alternative path is via legislation. The European Commissioner for the single market, Mr. Mario Monti, is strongly in favour of reform to the national taxation systems, which distort the single market. Although Member States jealously guard their own tax systems, various legislative initiatives concerning pensions are already in place and further legislation is planned:

  • Directive to liberalise the European Union's pension fund market to create a single market for pension funds is being drafted. Pension funds represent 20% of the European Union's GDP yet they are not covered by framework legislation. Pension fund managers would be allowed to offer their services throughout the Single Market, following approval from their home country authorities, using the "single passport" system as used by financials services providers.
  • Directive for supplementary (occupational) pensions for migrant workers has been adopted by the Council, with implementation in the Member States due by 25 July 2001. Although the thorny issue of tax has not been tackled in the Directive, it does allow posted workers, sent by their company to work in another Member State, to remain within their own occupational pension scheme, for two years. It also exempts both the worker and the employer from compulsory contributions to a supplementary pension scheme in the Member State to which the posted worker is sent, and protects vested pension rights.
  • Further proposals for supplementary pensions are due in January 1999, following the responses to the Monti Green Paper on supplementary pensions. It is expected that these will tackle taxation issues via legislation and there will be more news on these proposals in future editions.

For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000

This article was first published in the Winter 98/99 Hammond Suddards Pensions In Practice Newsletter

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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