Taxation has a profound impact on occupational retirement provision in Europe; Pension funds are affected by taxation on retirement income, taxation on dividends and interest payments and value added taxation (VAT).
Taxation is mainly a matter of national competence. Cross-border tax regulations and initiatives do also exist. These are closely monitored by PensionsEurope.
Withholding tax procedures
The obstacles with the withholding tax (WHT) procedures pose a major barrier to cross-border investments in the EU and to build the Capital Markets Union. In order to boost the economic growth in the EU, PensionsEurope calls on the European Commission to remove all the WHT barriers to cross-border investments. This means that the EU Member States shall respect the case-law of the Court of Justice of the European Union, reciprocally and automatically recognize pension funds, and simplify their WHT processes.
A large number of practical problems with the WHT refund processes still exist in spite of the EFTA judgment “Fokus Bank” (2004) and the case law of the Court of Justice of the European Union i.e. “Denkavit” (2006), “Amurta” (2007), “Aberdeen” (2009), and “Santander” (2012). The above-mentioned cases have shown that the WHT practices in many EU Member States are discriminatory with respect to dividends earned by foreign funds, and therefore, contradicting the European law.
The WHT refund processes are complex, expensive, and long-lasting. Often they can last even 10 years and cost half of the expected refunds, as costly tax advice in foreign languages is needed. Since the legal outcomes are uncertain, given that the legal recourse involves several levels of jurisdiction, often pension funds do not assert their justified reclaims. Therefore, PensionsEurope calls on the EU Member States to ensure simple, transparent, and inexpensive WHT refund processes.
PensionsEurope has proposed to the European Commission to establish an EU tax register of recognised pension institutions in order that Member States can reciprocally and automatically recognise pension institutions. Furthermore, in many countries pension institutions invest cross border via specialised investments funds and/or vehicles to increase the economies of scale, and it is important to ensure a tax-neutral treatment of these investment structures as well.
PensionsEurope has repeatedly expressed its strong opposition to the FTT proposal, due to the disproportionate impact of this tax on pension beneficiaries, its indiscriminate application to all transactions and its dissuasive effect on non-EU based investors to enter the European financial market. In the view of PensionsEurope, the FTT does not address major market failures which led to the crisis. Rather, it may reduce market liquidity, increase the costs of financing and could also increase market volatility.
PensionsEurope strongly refuses the introduction of an FTT and invites the 10 participating Member States to dismiss the Proposal. However, should the tax be introduced, then pension funds and financial institutions managing assets on their behalf should be exempt from its application. Pension beneficiaries, who are already severely affected by the crisis, should not pay for a financial crisis that neither they nor the pension funds caused.
On 17 January 2013, the US Internal Revenue Service (IRS) issued its final new Foreign Account Tax Compliance Act (FATCA) regulations. Most importantly, under the new regulations, foreign (i.e. non-US) financial institutions are to report directly to the IRS on accounts held by US taxpayers and entities in which these hold a substantial ownership interest. The goal is to improve compliance of US taxpayers with foreign financial assets / offshore accounts and to increase transparency for the IRS. The treatment of EU-based workplace pension plans is particularly relevant.
Pension funds generally qualify as 'foreign financial institutions" within the meaning of the FATCA regulations, but the regulations do also contain an exemption from the FATCA requirements for a broad range of pension funds. Various intergovernmental agreements will be entered into between the various Member States on the one hand and the US on the other, in order to implement FATCA in those Member States. These agreements should thus also contain said exemption for pension funds.
The Court of Justice of the European Union (ECJ) has recently adopted three landmark decisions regarding the VAT treatment of pension funds’ management and operational costs.
The Wheels Case
In its Wheels Case judgement of 7 March 2013, the ECJ determined that Defined Benefit (DB) pension schemes did not qualify as “special investment funds” and consequently they had to pay the VAT on investment management services. The Court argued that DB schemes could not be considered “special investment funds” since they are only available to employees of the sponsoring employer and because scheme members do not directly bear the investment risk.
The PPG Holdings Case
On 18 July 2013, the ECJ determined in its PPG Holdings Case judgement that sponsor companies were entitled to deduct the VAT they had paid on services relating to the management and operation of their pension schemes. This is provided that (i) the management costs and fees are paid (directly) out of/by the sponsor company and not by/out of the pension scheme, despite the fact that the pension scheme is a separate legal entity; (ii) the sponsor company has not passed those cost on to the pension fund; and (iii) there is a “direct and immediate link” between the management and operational cost of the pension funds and the business activity of the sponsor company.
ATP Pension Services Case
On 13 March 2014 the ECJ handed down a landmark ruling in the ATP PensionService A/S case dealing with the VAT treatment of Defined Contribution (DC) pension funds. The ECJ followed the opinion of the Advocate General, and has determined that DC pension funds should be considered as “special investment funds” referred in Article 13B(d)(6) of the Sixth Directive and therefore their management cost should be VAT exempted.
Moreover, the ECJ has echoed previous VAT rulings and has interpreted the concept of “management of special investment funds” in an extensive manner. The term should also cover those services relating to the opening of accounts in the pension fund system and the crediting to such accounts of the contributions paid.
Finally, the ECJ has also stated that the VAT exemption laid down in the Article 13B(d)(3) of the Sixth Directive for “transactions concerning payments and transfers”, should also cover the above mentioned services dealing with the creation of accounts in the pension fund and the crediting to those accounts of the contributions paid. It should be noted that the VAT exemption or Article 13B(d)(3) is defined in terms of nature of the services and not in terms of the institution providing or receiving the service.
The International Financial Reporting Standards (IFRS) are a set of international accounting rules that try to harmonise worldwide how a particular transaction or event must be introduced in the annual financial statements of a company. They are issued by the International Accounting Standards Board (IASB), and replace the previous International Accounting Standards (IAS).
Particularly relevant for pension funds is the IAS 26 Accounting and Reporting by Retirement Benefit Plans, which outlines the requirements for the preparation of financial statements of retirement benefit schemes. Also IAS 19 Employee Benefits, revised in 2011, which outlines the accounting requirements of the sponsoring company (not by the funds themselves) of employee benefits, including post-employment benefit plans other than DC plans. IAS 19 was endorsed by the EU in June 2012, and it’s applicable to annual periods beginning on or after 1 January 2013.
Looking forward, the European Commission is currently assessing the implementation in the EU of IFRS 9 Financial Instruments and its subsequent amendments. At the IASB level, there are other account standards relevant for pension funds being discussed, including: (i) Accounting for macro hedging; (ii) Insurance Contracts - 2013 Revised Exposure Draft and (iii) the IASB discussion paper on a Review of the Conceptual Framework for Financial Reporting.
PensionsEurope actively participated in the revision of IAS 19 and will continue to monitor the latest accounting developments both at EU and at international (IASB) level. In this regard, at the beginning of 2019 PensionsEurope provided comments to EFRAG on accounting for pension plans with asset-return promise. We welcome EFRAG’s initiative to provide ideas and approaches for a more meaningful accounting of plans with asset-return promise, as the usual IAS 19 accounting approach does not always support “a true and fair view” on plans’ assets and liabilities. We will continue to closely follow this EFRAG project together with EFRAG’s other current projects through EFRAG Pension Plans Advisory Panel.