TALKING TAX: Pension rights.... what is that exactly?

  • 2006-04-12
  • Luc Nijs
Announced early on in the millenium, yet initially disclosed in October last year and without due attention‚ the Occupational Pension Directive is one in its kind. For decades now Europe has tried to facilitate the free movement of workers. Experts were convinced that a stable social security environment (particularly in the pension sphere) was crucial in this respect.

Europe developed a coordination regime for first pillar (state managed) pension schemes since a complete harmonization was not feasible. You can hardly call it a success.
On a different track, and under increasing pressure of ever-declining state pension schemes, employees felt the need to arrange a supplemental old-age insurance environment for themselves, which these days is split up in second-pillar (employers pay part of the premium, which is tax faciltated) and third-pillar systems where the employee pays the full premium, which is tax deductible for that employee (under conditions of course). Although workable in a closed domestic system, imagine what a mess it becomes when you apply this in a international context. Two examples will illustrate.

Consider you spent 10 years working in your home country. You had a second-pillar insurance policy to which both your employer and yourself contributed, and then you are transferred to another subsidiary in Europe. You become liable for tax in that other country, but you want to continue contributing to your insurance policy back home. There is a strong likelihood that is not possible in a tax-facilitated way as your host-country will limit the deductions to premiums paid to domestic insurers. So you decide to stop making payments not to end up being taxed on something you paid out of your net income. Conclusion: you're worse off.

Or the following: After having worked for a couple of years, you decide to take a leap and accept a job in another country. You have a third-pillar pension scheme to which you like to continue contributing when working abroad. The previous example shows that there is a problem in the tax deductibility of the premiums paid. You think you have the solution: transfer your insured capital to an insurer in your host state to ensure deductibilty and continue to build up capital. Wrong! Your home insurer will only release the tax-tainted capital for transfer after income tax has been settled or equal collateral has been provided. Again, you're worse off.

The European Court of Justice has been fighting these practices for many years along the lines of the free movement of services, but it seems a road with no end. That's why I believe the above-mentioned directive is a good start that deserves more attention.
Luc Nijs is Head of Tax
at Sorainen Law Offices