EU Commission victory on Belgian pension fund taxation

The European Court of Justice (ECJ) has found that Belgian rules providing tax relief on contributions to Belgian pension funds (and also payments into Belgian savings accounts and life assurance policies), infringe the freedom to provide services: Commission v Belgium (ECJ, 23 January 2014).  Consequently, Belgium will now have to extend its relief on contributions to Belgian pension funds to those outside Belgium.

The decision also reinforces the fact that the Bachmann justification for infringing fundamental freedoms, based on cohesion of the tax system, has developed away from that original decision and must now be seen as having a more limited scope than might be expected from the decision of the ECJ in Bachmann itself.

Background

The EU Commission first challenged the disputed Belgian rules in 2006, but Belgium sought to defend them on the basis that they were necessary to protect the security of contributions made by Belgian savers. In 2010, the Commission referred Belgium to the ECJ. In its view, the Belgian rules infringed the freedom to provide services. This was both from the perspective of the recipient of those services as Belgian savers were deterred from using the services of pension providers in other Member States and also from the perspective of non-Belgian pension providers who were dissuaded from offering their services on the Belgian market. The Commission also considered the Belgian rules to be an infringement of the free movement of capital in that they discouraged Belgian savers from transferring sums to providers outside Belgium.

The Belgian Government accepted that the disputed rules infringed both the freedom to provide services and the free movement of capital, but considered that such restrictions could be justified by the need to ensure coherence of the Belgian tax system (the Bachmann defence) and the need to ensure effective fiscal supervision.

Judgment

The ECJ first considered the Belgian rules in the light of the freedom to provide services. It was undisputed between the parties that this freedom had been infringed and so the ECJ moved straight on to consideration of whether the restrictive Belgian rules could be justified by an overriding reason in the public interest.

Bachmann coherence

The Belgian Government argued that the rules were necessary to preserve the coherence of the Belgian tax system, drawing attention to the symmetry of the rules at issue: Belgium taxed pension income in circumstances where contributions had benefitted from the tax relief in question (where contributions were made to Belgian providers), but did not seek to tax pension income where that same tax relief was not available (where contributions were made to non-Belgian providers). This symmetry argument had famously succeeded in the earlier Belgian case of Bachmann and was subsequently refined in cases such as Commission v Denmark and Argenta Spaarbank, where the ECJ made clear that this defence can only apply where there is a direct link between a tax advantage granted and a corresponding disadvantage.

Applying this principle to the present case, the ECJ acknowledged that there was indeed a link between the available tax relief (the tax advantage) and the taxation of pension income (the corresponding disadvantage). However, the ECJ considered (just as it had done in the earlier and analogous case of Commission v Denmark) that it would be the transfer of a taxpayer’s residence and not the location of a pension provider that which would be the key factor liable to adversely affect cohesion of the Belgian tax system. Where a Belgian member of a Belgian pension scheme was granted tax relief on contributions made to that scheme and then, before benefits fell to be paid, transferred his residence to another Member State, then Belgium would be deprived of the power to tax the benefits corresponding to the tax relief already granted (at least where this was provided for in a double taxation agreement between Belgium and the relevant Member State). This would be the case, even though the pension provider was Belgian.

Conversely, the ECJ argued, there was nothing to prevent Belgium from taxing benefits paid by a foreign pension provider to a Belgian taxpayer as a counterbalance to the contributions it allowed to be deducted. Therefore, a blanket denial of relief on all contributions made to foreign pension providers could not be justified by the need to ensure cohesion of the Belgian tax system.

What is particularly interesting, however, is that the ECJ (as in Commission v Denmark) effectively failed to distinguish the facts of Bachmann from those of the present case. In Bachmann, the cohesion defence succeeded because there was found to be a direct correlation between the deductibility of contributions and the taxation of benefits. This was on the basis that, under Belgian law, where insurance premiums were tax deductible, the future benefits of the insurance were taxable. However, where premiums were not tax deductible, the future benefits were tax free. Given that the fact pattern of the two cases is so similar, it can only be assumed that, had Bachmann been decided today, the cohesion defence would not have succeeded on the facts of the case.

Effectiveness of fiscal supervision

The Belgian Government also sought to justify its restrictive rules by the need to ensure the effectiveness of fiscal supervision. However, the ECJ had even less sympathy for Belgium in this regard. The ECJ pointed out that Member States were able to rely on the Mutual Assistance Directive (now the Administrative Cooperation Directive) to obtain from another Member State any information necessary for it to correctly assess tax due and that, further, there was nothing to stop Belgium approaching a taxpayer directly to glean any relevant information and to deny the tax relief in question where information was withheld.

The EU Commission also sought to argue that the Belgian rules infringed the free movement of capital. However, as the ECJ had already found an unjustifiable restriction on the freedom to provide services, it did not need to go on to consider any of the other fundamental freedoms.

Comment

Commission v Belgium throws ever more doubt on the decision of the ECJ in the Bachmann case. Whilst the doctrine of cohesion, which is regularly relied on by Member States as a potential defence to discrimination and regularly (although not invariably) struck down by the ECJ, survives, it does so in a more limited scope that in the original Bachmann decision. Nevertheless, the failure of the ECJ to comment directly, or even to expressly distinguish the Bachmann case on its facts, is disappointing. However, it would appear that, as regards the cohesion of the tax system defence in general, the ECJ has moved on to a more rounded study of what may or may not threaten coherence.

In the wider context, the case will come as a clear warning to any Member States currently providing tax incentives for contributions into domestic but not foreign pension schemes and provide a heads up to any pension providers and/or investors who think they may be adversely affected by similar rules in other jurisdictions.