Tax barriers to a Single Market
in Life Insurance and Supplementary Pensions


Geoffrey Furlonger


Sir Leon Brittan, when he was Commissioner for EC Financial Affairs, was fond of saying that, while European insurers were free to offer life assurance and pension products throughout the European Community, it was less clear that consumers were free to buy them. Sir Leon was, of course, referring to the tax barriers that create a strong disincentive for companies and individuals to purchase non-domestic life assurance and pension products. Typically, tax credits or deductions available to consumers for domestic products are not available for life assurance policies and other products being offered by insurers established in other European Union (EU) member states.



The legality of these tax barriers was first tested before the European Court of Justice (ECJ) in the Bachmann case, where a German national temporarily resident in Belgium discovered that he could not gain the normal tax deductions from his Belgian income tax in relation to a German life assurance policy, which he would have received had he purchased an approved Belgian policy. Before the final Judgement, the Bachmann case was widely expected to confirm the illegality of such discriminatory practices; however, the Judgement proved to be a partial disappointment to Single Market enthusiasts. While the Court did indeed confirm in its Judgement of January 1992 that such practices were in contravention of the EC Treaty* provisions respecting freedom to provide services and free movement of labour (Articles 59 and 48 respectively), the Court also held that, in Mr. Bachmann's case, such discrimination was permissible owing to a lack of "cohesion" among tax regimes.

The Court had apparently been swayed by the Belgian Government's not unreasonable argument that, in the case of expatriates such as Mr. Bachmann, the Belgian State would probably be denied the normal tax due on benefits, since the mechanism employed by the Belgian authorities for collecting tax due is to require the insurer concerned to withhold the relevant tax from benefit payments. In the case of Mr. Bachmann, this procedure could not be enforced since the relevant German insurer resided outside the jurisdiction of the Belgian tax authorities. This problem was further compounded by the fact that Mr. Bachmann was an expatriate, likely to return to Germany and therefore also likely to reside outside the control of the Belgian tax authorities, there not being the necessary co-ordination between the German and Belgian tax authorities to redress the problem.

Was Bachmann a Fluke?
The essential question after the Bachmann case was whether Bachmann represents a general excuse for all member states to continue with discriminatory tax treatment of non-domestic EU life policies or whether the decision in Bachmann was limited to the special case of Belgium and its tax treatment of life policies and expatriates. If the latter is the case, the Court in Bachmann had effectively indicated the illegality, under EU laws, of such discriminatory treatment in the more usual case of an ordinary national wishing to purchase a policy provided by an insurer established outside the consumer's home state (not Belgium).

The view that Bachmann was a "fluke" resting on its own particular facts and that the European Union is only one ECJ decision away from the true Single Market for life assurance and pension products promised by the Third Life Assurance Directive received support from the Schumacker and Wielockx cases.

The Schumacker case was not concerned with life assurance or pensions, but with the refusal of the German tax authorities to take into account the married status of Mr. Schumacker who was a Belgian national residing in Belgium, but who derived 90% of his income from work in Germany.

Under the Belgian-German double taxation treaty, Germany was the state entitled to tax Mr. Schumacker's German earnings. Unfortunately, because Mr. Schumacker was not resident in Germany, the German tax authorities refused to take into consideration his married status and place him in a lower tax bracket. Had Mr. Schumacker been an ordinary resident in Germany, he would have benefited from his married status and would have been able to pay a lower amount of German income tax.

Basing its Judgement on Article 48 of the European Treaty, the ECJ ruled that it was an infringement of free movement of labour to treat a national of another member state employed in the territory of the first state, in the exercise of his or her right of freedom of movement, less favourable than one of its own nationals, i.e. Mr. Schumacker was entitled to have his married status taken into consideration and pay less income tax. The Schumacker case is important in its own right in respect of the taxation of mobile employees. However, it also has significance for the completion of the Single Market for life assurance and pension products. This is because five member states attempted to plead the "Bachmann defence" in their observations to the ECJ. This attempt was brushed aside in a manner suggesting that lack of cohesion between tax authorities might only be an argument that works in relation to an expatriate living in Belgium and the special tax collection mechanism employed in Belgium.

The member states submitting observations pleaded that, owing to the lack of cohesion between the German and Belgian tax regimes, there was a danger that Mr. Schumacker would have his married status taken into account twice (in Belgium and in Germany), i.e. that Mr. Schumacker would be able to "have his cake and eat it" - exactly the same type of argument as that successfully used against Mr. Bachmann.

This argument was rejected by the ECJ for the simple reason that the majority of Mr. Schumacker's taxable income (90%) was derived from one state and that consequently Mr. Schumacker would not be receiving a double benefit and therefore cohesion between tax regimes was simply not an issue.

The rejection of the "Bachmann defence" by the ECJ in the Schumacker case is very encouraging for supporters of the Single Market. While the facts are not directly connected with the pension and life assurance markets, the examination and rejection by the ECJ of the "Bachmann defence" suggests that each subsequent case involving tax discrimination will be carefully examined on its own merits. This encourages the belief that relevant future cases not involving Belgium's particular methods of tax collection on life policies may be immune from member states' arguments about cohesion among tax regimes. This notion derives further support from the Wielockx case.

Unlike the Schumacker case, the Wielockx case did involve consideration of a retirement scheme. A Belgian national and resident of Belgium, Mr. Wielockx worked as a self-employed physiotherapist in The Netherlands. Dutch tax law permits self-employed individuals to shelter part of the profits of their businesses in private pension plans free of income tax. This regime is not, however, available to non-residents. Mr. Wielockx was claiming that such discrimination was contrary to EU law.

The Judgement in this case was issued by the European Court of Justice on 11 August 1995. The Advocate General's Opinion had already advised that such discriminatory treatment of non-residents is contrary to EU law. The European Court of Justice in its Judgement followed the Advocate General's Opinion and rejected The Netherlands' use of the "Bachmann defence" in ruling that The Netherlands had illegally discriminated against Mr. Wielockx.

As with the Schumacker case, the most significant feature of the Wielockx case for the life insurance and pensions industry was not, however, the facts of the case, but the lengthy discussion of the Bachmann case contained within the body of the Advocate General's Opinion. Just as with the Schumacker case, both the Advocate General and the ECJ rejected the "Bachmann defence" - in this instance offered by The Netherlands.

In the Wielockx case, The Netherlands argued that the inability of a non-resident self-employed person to shelter income in a retirement fund is justified by the fact that The Netherlands would not be able to tax the benefit on retirement because under the Belgian-Dutch double taxation treaty Belgium alone would be able to tax the benefit. This is because the Belgian-Dutch double taxation treaty follows Article 18 of the OECD Model Treaty, which cedes to the state of the individual's residence the right to tax pension benefits, which in Mr. Wielockx's case will presumably not be The Netherlands at the time of his retirement.

The Advocate General, in his Opinion, rejected The Netherlands' argument on various grounds, including the fact that there is no compulsion for Belgium or The Netherlands to follow the OECD Model Treaty. Furthermore, EU law is superior to other international treaty obligations that conflict with the EC Treaty. The principles of free movement in the European Union and the avoidance of discrimination under EU law should therefore prevail, at least in this case, over considerations of cohesion between the Dutch and Belgian tax regimes.

In following the Advocate General's Opinion, the ECJ has provided further support for the belief that the Bachmann case rests on is own unique facts and that the non-deductibility of contributions to "foreign" (EU) pension plans and group life products in many European member states cannot be justified under EU law.



At the time of writing we await the Court's judgement in the Safir**case due to be delivered on 28 April 1998. However, if the court follows the Advocate General's Opinion then in the case of individuals residing permanently in their home state who purchase foreign life insurance or pension products the Bachmann defence will not normally be available as an excuse for discriminatory tax-treatment of premiums. The Advocate-General concludes that imposition of a tax by the Swedish government on life insurance premiums payable to a foreign insurer which is not imposed on premiums paid to a domestic insurer is contrary to Article 59 of the EC Treaty respecting freedom of services.

It may well be the case that the Safir case leads to the creation of a true single market for life insurance and supplemental pension schemes - at least for permanent residents of member states. If so, Sir Leon Brittan and many others will be very happy.


01-04-1998 EU Practice William M. Mercer, Brussels