In February, the European Court of Justice (ECJ) ruled that Danish legislation allowing tax deductions for pension contributions paid to life offices domiciled in Denmark contravened EU law on the free flow of services inside the single market.

Sweden, which had similar legislation and filed a brief in support of Denmark in the case, announced immediately after the ruling that it would amend its legislation accordingly.

However, Denmark has yet to follow suit. Leonardo Sforza, head of research for Hewitt Associates in Brussels, says foot-dragging was hardly atypical. “It very much depends on the political willingness of the government in question,” he says. If Denmark fails to comply, then the European Commission can bring a further case against the country in the European court, which can levy a fine on the government.

Mr Sforza says it is welcome that the Commission is prosecuting countries with tax laws that impede the free flow of goods and services within the EU. He says: “It is very basic; national tax systems have to comply with the principles of the European treaty. Countries cannot treat tax differently just because cross-border operations are involved. It is a very basic principle to ensure the effective functioning of the single market. These principles of the treaties are non-negotiable.”

In 2001, the Commission laid out explicit guidelines describing the framework to be applied when assessing the cross-border impact of national tax regimes. Under European law, taxation is a matter for national policy on the member state level, but is nonetheless subordinate to single market rules.

The Commission was referring to these guidelines in bringing the case against Denmark. Mr Sforza says there remains a few countries where the question of whether national taxation law is compatible with European law remains unanswered.

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ECJ GETS TOUGH ON TAXATION

Two recent rulings by the European Court of Justice (ECJ) firmly indicate the court’s intolerance of unlawful tax measures and should serve as a warning to contravening countries.

“Two very recent ECJ cases on direct taxation, against Germany on 6 March and against the UK on 13 March, confirm and even reinforce ECJ’s position,” says Leonardo Sforza, head of research at Hewitt Associates. “Generally speaking there is much greater confidence within the business community and within the financial services industry towards the removal of discriminatory and unlawful national tax measures.”

The ECJ ruled against the UK on thin capitalisation provisions effective between 1988 and 1995 that give rise to different treatment between resident borrowing companies according to the place in which the lending company has its seat and against Germany on the way of taxing dividends received by residents from non-resident companies.

KP

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