The European Commission has decided to refer Finland to the European Court of Justice because of failure to comply with a Reasoned Opinion on its legislation which discriminates against foreign pension funds. The Commission considers the Finnish provisions on taxation of dividends distributed to pension funds to be incompatible with the free movement of capital.
According to the Finnish legislation, dividends paid by a company which is resident in Finland for tax purposes to a non-resident pension fund, are subject to a withholding tax on gross income at a rate of 19.5%. Finnish pension funds, on the other hand, are taxed under a special regime: 75% of dividend income on investment assets is subject to corporation tax (tax rate 26%), but tax is calculated on net income, i.e. after deduction of costs as well as current pension liabilities. In practice, the effective tax rate on dividend income paid to a Finnish pension fund is therefore lower than 19.5%.
According to the Commission the difference in treatment between foreign and domestic pension funds amounts to an obstacle to the free movement of capital within the meaning of Articles 63 TFEU and 40 EEA. The difference in treatment constitutes an arbitrary discrimination which cannot be justified on the grounds provided under Article 65 TFEU.
In case the Court of Justice confirms the interpretation of the Commission, foreign pension funds may be entitled to tax refunds retroactively.
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