Legal background
Almost 90% of all employees in the Netherlands accumulate pension capital while participating in an employer sponsored pension plan. According to the Dutch Pensions Act, employees who start working for a new employer, are in principle entitled to transfer their pension capital to the pension administrator of their new employer. This is also the case if the employer starts working for an employer in another EU Member State. An employer sponsored pension plan is almost always administered by a pension administrator which is established in the same EU Member State as the employer.
The Dutch Wage Tax Act 1964 states that in case an employee starts working for a new employer which in the Netherlands, a transfer of pension capital to the pension administrator of this employer, is in principle exempt from Dutch wage withholding tax. However, in case an employee starts working for a new employer in another EU Member State, a transfer of pension capital to the pension administrator of the new employer, is subject to wage withholding tax, unless a dozen conditions are met. These conditions are included in the Decree of the Ministry of Finance concerning the international aspects of pensions.
Actions taken by the Commission
On 27 November 2019, the Commission has send an additional reasoned opinion to Netherlands. In this reasoned opinion, the Commission has requested the Netherlands to adjust three sets of tax rules which restrict the transfer of pension capital by employees. The Netherlands did not adjust the tax rules concerning accordingly. On 14 May 2020, the Commission announced that it has started an infraction procedure against the Netherlands concerning the transfer of pension capital by employees. The Commission is of the opinion that the Dutch tax treatment of transfers of pension capital by employees to another Member State, is a restriction of the freedom of movement of workers, the freedom to provide services and the free movement of capital.
Our initial legal analysis
The Decree of the Ministry of Finance concerning the international aspects of pensions contains four conditions for a tax exempt transfer of pension capital to another Member State, which are in practice hard to meet. Firstly, it is not allowed that after the transfer of pension capital, the pension capital concerning is paid out as a lump-sum. Lump sum payments are currently not allowed in the Netherlands, but common in various Member States. Secondly, the employee needs to sign an employment agreement for a period of a least five years. Temporary employment agreements for a period of at least five years are unusual, also in the Netherlands. Thirdly, the employee has to prove to the Dutch Tax Authorities that the retirement benefits related to the pension capital to be transferred, are subject to personal income tax in his or her state or residence. Some Member States do not tax retirement benefits, because the do not have tax incentives for accumulation of pension capital. Fourthly, the employee proves to the Tax Authorities that the pension plan of his new employer is common in the Member State in which the employer is established. There is no information available on how to meet this condition.
Although it is possible to meet the aforementioned conditions, meeting these conditions results in a substantial administrative burden for employees. And although no official figures regarding the number of transfers of pension capital to another Member State are available, it is widely known that the past years, the number of such pension transfers has been negligible. This number is especially surprising if one considers that in principle all employees who start working for an employer in another Member State, are in principle entitled to a transfer of pension capital to the pension administrator of this employer. Furthermore, it should be noted that to our best knowledge, the European Court of Justice has not decided in a similar case before.
Impact
If the European Court of Justice judges that the Dutch tax treatment of transfers of pension capital by employees to another Member State, is a restriction of the freedom of movement of workers, the freedom to provide services or the free movement of capital, the Netherlands needs to adjusts the legislation concerning. If this is the case, a transfer of pension capital of an employee to another Member State, shall become less complicated. As a result, the number of transfers of pension capital from the Netherlands to another Member State, is expected to increase.
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