Pension and withholding tax: removing obstacles

​More than half of the capital managed by PGGM for its pension fund clients is invested in countries of the European Union. EU law stipulates that a Member State should tax a foreign pension funds in the same manner as a local pension fund.

Unfortunately, there is no shared fiscal definition yet of ‘pension fund’ within the EU. As a result it is often difficult for a foreign fund to receive the same fiscal treatment as that of a local fund within a Member State. PGGM invests much energy in this on behalf of its clients. A local pension fund in an EU Member State is often exempt from taxation (including dividend withholding tax) on investment income, which is also the case in the Netherlands. Whereby the principle applies that tax is paid by the individual beneficiary when receiving the retirement benefit.

Besides that, in many cases a Dutch resident - and this applies to a Dutch pension fund as well - can claim a reduced dividend withholding tax rate under a tax treaty entered into between the Netherlands and the country in which the dividend is paid. On paper, this is an administrative procedure.

In practice, however, it is apparent that in this area the EU does not yet function as a well-integrated capital market. In every Member State, PGGM is confronted with different national systems and dealing with that is complex, time consuming and cost-increasing. This represents a serious obstacle when having investments in almost all of the EU Member States.

In concrete terms, it means that PGGM engages external service providers to claim a refund of any excess dividend withholding tax paid. Since this involves substantial costs for our clients, we support the intention of the European Commission to end this, together with the EU Member States. To this end, the European Commission recently developed a code of conduct , which is intended to help EU Member States set up their (dividend) withholding tax procedure more efficiently.

PGGM is calling for the Netherlands and all the other Member States to implement the proposals contained in this code of conduct, whereby:

• the EU Member States work together on a single (integral, pan-European) solution, which preferably comprises a ‘single IT platform’ for the whole of the EU;
• fair procedures are applied and there are sufficient safeguards against abuse;
• one single fiscal definition of ‘pension fund’ is used throughout the EU so that, on the basis of reciprocity, an EU pension fund will gain access in another Member State to the applicable tax status of a local pension fund.

This will help to make the tax system within the EU simpler and fairer and it will, moreover, save costs for pension fund participants.

Authors: Niels Krook and Jesse Martens