On 16 November 2023, the CJEU ruled that the application of Dutch legislation which allows for an accrued pension to be transferred to a foreign pension provider under certain conditions without the levy of wage tax is in breach of Article 45 of the Treaty on the Functioning of the European Union (TFEU).

Under Dutch tax rules, a tax-free transfer of an accrued pension to a foreign pension fund is only permitted if the foreign pension fund meets several criteria. These criteria are derived from Dutch regulatory conditions that apply to Dutch pension funds and qualifying pension schemes. Only where the foreign pension fund to which the pension is transferred meets all criteria, a tax-free transfer is possible. An approval from the Dutch tax authorities is furthermore required for the transfer. The application of these strict criteria makes it virtually impossible to transfer a pension from the Netherlands to a pension provider in another EU Member State. Therefore, the European Commission initiated proceedings against the Netherlands. In this case, the CJEU specifically focused on the requirement that the EU Member State to which the pension is transferred cannot provide for a broader arrangement in a pension scheme for lump sum payments compared to arrangements qualifying in the Netherlands. In the Netherlands, the possibility for a lump-sum arrangement is very limited which causes this criterion to be a hurdle for foreign pension schemes to qualify.

The CJEU ruled that the Netherlands failed to comply with its obligations under the free movement of workers (Article 45 TFEU). According to the CJEU, the Dutch rules limit Dutch workers to move to another Member State and contribute their Dutch pension rights to a foreign pension scheme. This makes Dutch workers also unattractive for foreign employers. The CJEU rejected the Netherlands' justification for the restrictions and concluded that the legislation goes beyond what is necessary and therefore the restriction is not a proportional measure.

This CJEU case regarding the Dutch wage tax treatment of the transfer of accrued pensions may also have implications for foreign pension funds investing in the Netherlands.

Dutch tax rules provide for an exemption of corporate income tax (CIT) and dividend withholding tax (WHT) on investments made by qualifying pension funds. Foreign pension funds are entitled to the same tax exemptions provided they are sufficiently comparable to Dutch pension funds.

In a Decree issued by the Dutch State Secretary of Finance, criteria are provided for determining if a foreign pension fund is comparable (the “Decree”). This Decree contains a strict set of requirements. One of the requirements is that the foreign pension scheme should not allow for lump sum payments, except for the redemption of small pensions for administrative reasons.

Considering the CJEU verdict in relation to the fundamental of free movement of workers, we see good arguments that the strict criteria of the dividend WHT and CIT exemptions are also in breach of EU law, in particular in breach with the fundamental of the free movement of capital (Article 63 TFEU).

A Dutch pension fund is eligible for a dividend WHT exemption at source (per 1 January 2024) or a refund of Dutch dividend WHT. According to the Dutch Dividend Withholding Tax Act, a foreign pension fund may be eligible for a full refund of the Dutch dividend WHT on its Dutch portfolio investments if it is tax-exempt in its country of residence and would be tax-exempt from Dutch CIT if it were resident of the Netherlands. Again, this comes down to a comparability assessment based on the strict criteria outlined in the Decree. Meeting these requirements is often difficult (if not impossible) for foreign pension funds. Consequently, a strict application of the criteria of the Decree to foreign pension funds may be in breach of EU law.

Dutch pension funds are typically exempt from Dutch CIT, and as a result are not taxed on income derived from directly held Dutch real estate assets. A foreign pension fund can apply the same exemption, but only if it is considered sufficiently comparable to a Dutch pension fund, which requires meeting the strict requirements under the Decree. Similarly as to the dividend WHT exemption, denying the CIT exemption to foreign pension funds may be in breach of EU law as well.

This is particularly relevant for pension funds that currently invest in Dutch real estate through Dutch investment institutions (fiscale beleggingsinstelling, or FBI). As this tax-neutral regime will be abolished for real estate investments in 2025, many FBIs are opting to restructure to tax-transparent funds. As a result, many foreign pension funds are faced with the choice of either taking a position on their comparability with Dutch domestic pension funds or entering into a CIT liability on real estate income.

To the extent the statute of limitations has not lapsed, we recommend that foreign pension funds assess their comparability in the light of this CJEU case law and based on the outcome proceed to file reclaims of dividend WHT and CIT levied. For foreign pension funds that have had their reclaims of Dutch dividend WHT or exemptions of CIT denied in the past by the Dutch tax authorities based on non-comparability, we recommend to re-assess their eligibility.