Tax Treatment of Pensions in Finland

1

• Tax Treatment of Pensions in Finland
•  
• Non-resident
• - only Finnish source pensions
• - 35 withholding tax on gross amount
• - tax treaties
• - public sector pensions 35 tax almost always
  allowed
• - private sector pensions 35 tax often
  allowed
•  
• Resident
• - global pensions
• - progressive tax on net income
• - foreign tax credit
• tax treaties may require exemption
• especially for public sector pensions

2
The facts of the Turpeinen Case (C-520/04)   -
KHO 2004/3330 (106) - Mrs. Turpeinen - Finnish
national - moved abroad in 1998 (via. Belgium to
Spain) - Finnish source public sector pension is
her only income - resident treatment until 2001
(28,5 tax) - non-resident treatment since 2002
(35 tax) - no taxes in Spain   gt the tax
increased only because became a non-resident
3

• Contrary to EC law?
• Art. 18 (free movement of EU citizens)
• Art. 39 (free movement of workers)
• Directive 90/365/EEC on the right of residence
  for employees and self-employed persons who have
  ceased their occupational activity

4
The EC Treaty   Art. 39 - prohibits taxation,
which restricts free movement of workers - also
pensions, if the person used the right to free
movement of workers while working (C-302/92
Sehrer) - does not apply to employment in the
public service   Art. 18 - prohibits taxation
that restricts the exercise of the free movement
of EU citizens including retired persons - the
use of this right must not lead to a
disadvantage - conflict if a citizen is treated
less favourable than she would be treated if she
had not used the right to free movement (e.g.
C-224/02 Pusa and C-224/98 DHoop)    
5

• The Commission sees a conflict
• - official notice to the Government of Finland on
  19.4 2001
• repeated statement on 14.12.2004
• gt - 35 tax restricts the free movement of
  retired people
•  
• Mrs. Turpeinen Case
• - has used the right to free movement
• - worse treatment because used the right

6

• Cases on the different treatment of
• residents and non-residents
•  
• may be treated differently if in different
  situation
• (e.g. C-234/01 Gerritse, C-279/93 Schumacker,
  C-391/97 Gschwind, C-87/99 Zurstrassen, C-169/03
  Wallentin, C-80/94 Wielockx and C-112/91 Werner)
•  
• - different treatment is prohibited if in a
  similar situation
• (e.g. C-80/94 Wielockx, 175/88 Biehl, C-107/94
  Asscher, C-279/93 Schumacker, C-234/01
  Gerritse, C-169/03 Wallentin and C-364/01
  Barbier)
•  

7
C-279/93 Schumacker - non-resident taxpayer
that has most of his income from the source state
is in a similar situation as the residents (See
also C-151/94 Biehl II, C-80/94 Wielockx and
C-169/03 Wallentin. See also Commission
Recommendation of 21.12. 1993 on the taxation of
EC, OJ 39/1994 p. 22) gt source state has a
better possibility to take into account the
personal situation of the taxpayer gt must not
be subject to a more severe tax treatment in the
source state than the residents gt e.g. similar
rights to personal deductions
8

•  
• C-234/01 Gerritse
• different treatment may be prohibited even if
  most of the income is not from source state
• - withholding tax levied on the gross income
  must not be higher than the progressive tax
  levied on the net income of a resident
• - personal deductions not necessary
•  
• Mrs. Turpeinen
• - all income from Finland and taxed only in
  Finland
• gt the personal situation can be taken into
  account only in Finland
• gt resident treatment

9
Justifications?   - objectively acceptable
reason? - a mandatory requirement of public
interest? - appropriate, proportionate, least
restrictive?   - effectiveness of fiscal
supervision? - reduction in tax revenue? -
prevention of abuse? - territoriality and
cohesion principle? gt no cases in which accepted
(Except C-204/90 Bachmann)     gt in any case,
the Finnish rules go well beyond what is
necessary
10
Concluding Remarks   - conflict - no
justification - new tax system from 1.1.2006 gt
pensions of non-residents under the progressive
tax system