Another development came in lingering concerns about whether local tax rules in EU countries unfairly favor investments 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”), insofar as they prohibit restrictions on the free movement of capital due to the effective tax burden, require tax treatment of pension funds not only between EU countries, but also with countries outside the EU. (Article 63 provides in particular that “all restrictions on the movement of capital between Member States and between Member States and third countries will be prohibited. Some large non-EU pension funds with significant investments in certain EU countries have found it useful to take legal action in this area to recover the taxes they have paid. A recent case involved the College Pension Plan of British Columbia.
To oversimplify, under German tax law, German pension funds, although subject to tax on their investment income, can reduce their taxable profit by deducting amounts set aside to meet their pension payment, these amounts are called technical provisions, and German resident funds are also allowed to deduct the withholding tax paid from their final income tax, with the possibility of obtaining a refund of excess amounts. The view is that this effectively allows German funds to pay less than 15% tax on dividends received. However, the dividends paid to the College Pension Plan by the German payers had been subject to withholding at the rate of 15% provided for by the tax treaty between Canada and Germany. The Canadian scheme had requested a refund and, after the refund was denied, appealed to a German tax court, the Finanzgericht München (Financial Court, Munich). There, the Munich Finance Court first asked the European Court of Justice (“ECJ”) to consider two interpretative questions of EU law that needed to be answered. In 2019, the CJEU essentially answered these two questions by ruling that the College Pension Plan is objectively comparable to a German pension fund, and also that the German withholding tax on dividends levied on the Canadian plan would violate free movement. capital provided for by the TFEU. if, like German pension funds, the College Pension Plan uses the dividend income received for its technical provisions for pension liabilities (that is to say adds dividend income to the reserve for retirement liabilities). Whether this was so was a question of fact which the CJEU then referred to the Financial Court in Munich. Thus, the initial ECJ decision, College Pension Plan of British Columbia, C-641/17, was in favor of the Canadian plan.
However, the Munich Finance Court issued its decision on the dismissal in December 2021, and it is not favorable to the Canadian plan. The Munich Finance Court’s referral decision reviewed the financial statements of the College Pension Plan and ruled that the pension fund had not allocated the dividends received to constitute technical provisions for the pensions that it will have to pay to the ‘to come up. Thus, the refund requests were rejected. The College Pension Plan is supposed to appeal to the Federal Tax Court. One issue 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 case, non-EU pension funds have so far suffered a setback on claims for reimbursement based on the free movement of capital provisions of the TFEU, at least in Germany.