Worldwide:
Continued European Litigation Over Disparate Tax Treatment Of Non-EU And EU Pension Funds
28 March 2022
Groom Law Group
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Another development has arisen in the ongoing concerns regarding
whether local tax rules in EU countries unfairly favor investment
by local pension funds over those established outside the EU.
The general theory is that Articles 63, 64, and 65 of the Treaty on
the Functioning of the European Union (“TFEU”), to the
extent they prohibit restrictions on the free movement of capital
by reason of the effective tax burden, require comparable tax
treatment of pension funds not only among EU countries but also
with countries outside the EU. (Article 63 provides in part
that “all restrictions on the movement of capital between
Member States and between Member States and third
countries shall be prohibited.”) Some large
non-EU pension funds with sizable investments in some EU countries
have found it worthwhile to litigate in this area to recover taxes
they have paid. A recent case has involved the College
Pension Plan of British Columbia.
To greatly oversimplify, under German tax law, German pension
funds, though subject to tax on their investment income, are able
to reduce their taxable profit by in deducting the amounts reserved
to meet their pension payment obligations, these amounts are
referred to as technical provisions, and German resident funds are
also allowed to credit withholding tax paid against their final
income tax, with the ability to obtain refunds of excess
amounts. The view is that this effectively permits German
funds to pay less than 15% tax on dividends received.
Dividends paid to the College Pension Plan by German payors,
however, had been subject to withholding at the 15% rate provided
under the Canada-Germany tax treaty. The Canadian plan had
applied for a refund, and after the refund was denied, appealed to
a German tax court, the Finanzgericht München (Finance Court,
Munich). There, the Finance Court, Munich, first requested
that the European Court of Justice (“ECJ”) consider two
interpretative questions of EU law to be answered. In 2019,
the ECJ essentially answered those two questions by holding that
the College Pension Plan is objectively comparable to a German
pension fund, and also that the German dividend withholding tax
levied from the Canadian plan would violate the free movement of
capital provision of the TFEU if, like German pension funds, the
College Pension Plan uses the dividend income received for its
pension liability technical provisions (i.e. adds the
dividend income to the pension liability reserve). Whether it does
so was a question of fact which the ECJ then referred back to the
Finance Court, Munich. Thus, the initial ECJ decision,
College Pension Plan of British Columbia, C-641/17, was favorable
to the Canadian plan.
However, the Finance Court, Munich, issued its decision on the
referral in December 2021, and it is not favorable to the Canadian
plan. The Finance Court, Munich’s decision on referral
examined the College Pension Plan’s financial statements and
held that the pension fund did not allocate dividends received to
make technical provisions for pensions which it will have to pay in
the future. Thus, the claims for refund were dismissed.
The College Pension Plan is understood to be appealing to the
Federal Fiscal Court. One question the decision raises may be
the extent to which it is difficult to transpose German civil law
pension concepts such as technical provisions with Canadian common
law trust concepts. In any event, non-EU pension funds have
received a setback for now on refund claims based on the free
movement of capital provisions of the TFEU, at least in
Germany.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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