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4. Under Paragraph 96(2) to (6) of the TVL The Finnish provisions on the deductibility contributions to voluntary pension schemes of pension insurance contributions run by Finnish insurance institutions are under certain conditions and within certain limits either fully or partially deductible. A full deduction of contributions is for example allowed within a limit of FIM 50 000 if the pension is payable as an 2. Under Paragraph 96(1) of the Tulover- old-age pension at the earliest when the olaki (Income Tax Law, 'the TVL') pension insured reaches the age of 58 and the insurance contributions to certain compul- insured can prove that his theoretical sory or statutory schemes are fully deduct- pension cover does not exceed a certain percentage of his income.4 It is common ground that until 1996 the rules in Para- 1 — Original language: English. 2 — Case C-204/90 [1992] ECR I-249. 3 — Case C-300/90 [1992] ECR I-305. 4 — Paragraph 96(2) to (4) of the TVL.

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graph 96(2) to (6) applied without distinc- 6. Paragraph 96(9) is also subject to a tion to contributions to Finnish and foreign transitional provision. For the tax years insurance institutions. 1996 and 1997 contributions for voluntary pension insurance taken out with foreign institutions before 1 September 1995 are subject to the provisions which were in force in 1995, but only up to FIM 15 000 a year.

5. Paragraph 96(9) of the TVL — which was introduced less than 12 months after Finland's accession to the European Union 5 and entered into force on 1 January 1996 — now excludes the deduction of contributions for voluntary pension insur- 7. The working party on whose proposal ance taken out with a foreign insurance the new Paragraph 96(9) was based con- institution. By way of exception contribu- sidered that it was necessary to prohibit the tions to a foreign pension insurance insti- deduction of contributions to foreign vol- tution remain deductible in two situations, untary pension insurance because the pen- namely sion to be received in due course would in practice often be excluded from taxation in Finland either because the recipient had moved abroad or because of lack of information about the pension payments.6

12. In 1996, which is the tax year at issue, Mr Danner paid pension insurance con- tributions to the two German institutions of a total of DEM 11 176. In the same year he took out a pension insurance policy with Suomen Keskinäinen Henkivakuutusyhtiö 10. In 1976 he started to pay pension and paid to that Finnish institution pension insurance contributions to the German insurance contributions of FIM 17 635. In Bundesversicherungsanstalt für Angestellte his tax declaration for 1996 he claimed that (BfA) and to the Berliner Ärzteversorgung. pension insurance contributions of a total According to information provided by of FIM 51 163 should be deducted from his Mr Danner the BfA operates a general income. pension insurance scheme which is in principle compulsory for all employees employed in Germany. The contributions to and the benefits granted by the BfA are governed by law. The Berliner Ärzteversor- gung operates a supplementary pension 13. The tax authorities allowed him to insurance scheme set up by a professional deduct contributions for voluntary pension organisation of doctors which is in prin- insurance only to the extent of 10 % of his taxable income, that is FIM 22 562. Mr Danner's request for a rectification of that 7 — Legislative proposal HE 76/1995. 8 — Mr Danner has made some contradictory statements in that assessment was rejected by decision of regard. 17 February 1998.

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— Article 56 EC which protects the free pretation. I propose therefore to deal only movement of capital, with the provisions expressly mentioned in the order for reference.

— Article 12 EC which prohibits discrimi- 20. The Commission also expresses doubts nation on grounds of nationality, and whether the Finnish tax authorities actually applied the contentious Paragraph 96(9) of the TVL or the related transitional provi- sion in Mr Danner's case.

— Article 87 EC which concerns State aid. 21. In my view, even if the Finnish tax authorities did not apply the provision in issue, the Court's reply to the question referred might be of relevance for the main proceedings (for example if the referring 18. In the light of the facts of the main court has the power not only to review the proceedings and the Court's case-law the legality of the tax authorities' decision, but Commission suggests that the Court should also to decide which rule they should also examine the compatibility of such apply). In any event the question is not national rules with Article 39 EC or manifestly irrelevant, so that the Court has Article 43 EC which protect respectively to answer the question referred. the freedom of movement of workers and the freedom of establishment. 9

Article 49 EC 19. In my view, it can be assumed that the referring court — which is fully aware of the Court's judgments in Bachmann, Safir 10 and other relevant cases — deliber- ately chose not to refer a question on those articles. Moreover none of the other parties Applicability of the Treaty provisions on has submitted observations on their inter- freedom to provide services

24. A second issue is whether the services which the two institutions provide fall within the scope of the provisions on freedom to provide services. It is clear that 27. Finally, pursuant to Article 50 EC the services provided by private pension pro- provisions on freedom to provide services viders are within the scope of Article 49 et apply to services which are 'normally seq. EC. 1 1The Court has however not yet provided for remuneration'. According to decided whether those provisions apply to, the Court's case-law the essential char- for example, pensions provided by com- acteristic of 'remuneration' lies in the fact pulsory pension schemes which are gov- that it constitutes consideration for the erned by State social security legislation and operate according to the redistribution 12 — Case C-109/92 Wirth [1993] ECR I-6447. 13 — Case C-158/96 Kohll [1998] ECR I-1931, paragraph 21 of the judgment and Case C-157/99 Geraets-Smits and 11 — See Safir, cited in note 10, paragraph 22 of the judgment. Peerbooms [2001] ECR I-5473, paragraph 54.

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31. Moreover, the refusal to allow the deduction of contributions for pension 29. Under the first two sentences of Para- insurance taken out with foreign institu- graph 96(9) of the TVL 'contributions for tions also discriminates on grounds of voluntary pension insurance taken out with nationality against foreign insurance pro- a foreign insurance institution are not viders. In that regard the Court has held deductible. An insurance policy is, how- that Article 49 EC entails the abolition of ever, regarded as taken out in Finland, if it any discrimination against a person provid- is granted by a fixed establishment in ing services on account of his nationality or Finland of a foreign insurance institution.' the fact that he is established in a Member Under the transitional rule for the tax years State other than the one in which the 1996 and 1997 the deduction of contribu- service is provided. 17 In the present case tions paid to foreign institutions is allowed the discrimination on grounds of the up to a ceiling of FIM 15 000. Contribu- tions to Finnish institutions are not subject to that ceiling. 15 — Case C-381/93 Commission v France [1994] ECR i-5145, paragraph 17 of the judgement. 16 — Safir, cited in note 10, paragraph 30 of the judgment. 17 — Case C-353/89 Commission v Netherlands [19911 ECR 14 — Geraets-Smits and Peerbooms, paragraph 58 of the judg- I-4069, paragraph 14 of the judgment with further ment. references.

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— by an exemption expressly provided for 35. According to one line of cases, national by the Treaty (e.g. Articles 45 and 46 rules which discriminate as regards the EC which are applicable pursuant to origin of the service in question are com- Article 55 EC), or patible with Community law only if they can be brought within the scope of an express exemption, such as those contained in Articles 45 and 46 EC. 18 The Court has never formally abandoned that principle. — by other grounds of justification which are not provided for by the Treaty but which have been recognised by the 18 — Case 352/85 Bond van Adverteerders [1988] ECU 2085, paragraphs 32 and 33 of the judgment; Commission v Court and accepted by it as overriding Netherlands, cited in note 17, paragraph 15; and Case C-288/89 Collectieve Antennevoorzienmg Couda [1991] requirements in the general interest. ECR I-4007, paragraph 11.

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37. In view of the fundamental importance of the question whether (overtly) discrimi- natory measures such as those at issue in the main proceedings can be justified on grounds not expressly mentioned in the Treaty, the Court should clarify its position 36. In most of the recent cases, however, in order to provide the necessary legal involving national rules which might have certainty. Such clarity and legal certainty been regarded as (directly) discriminatory, are essential for national courts, litigants, the Court has avoided assessing whether the governments of the Member States, the the rules in issue were discriminatory, and institutions and citizens in general. has examined grounds of justification not expressly mentioned in the Treaty. For that purpose the Court has either classified the rule in issue merely as an obstacle to freedom to provide services 22 or referred to a 'difference in treatment' which might be justified on grounds not mentioned in the Treaty. 23 Bachmann and Commission

the system of preliminary rulings and on the provision of services. Once it is explains the unique procedure whereby accepted that justifications other than those Member States and the Commission are set out in the Treaty may be invoked, there systematically invited to submit observa- seems no reason to apply one category of tions and indeed why the judgment of the justification to discriminatory measures Court and the Opinion of the Advocate and another category to non-discrimina- General in every case are published in no tory restrictions. Certainly the text of the fewer than 11 languages. Treaty provides no reason to do so: Article 49 EC does not refer to discrimi- nation but speaks generally of 'restrictions on freedom to provide services'. In any event, it is difficult to apply rigorously the distinction between (directly or indirectly) discriminatory and non-discriminatory measures. Moreover, there are general interest aims not expressly provided for in 39. The present case well illustrates why the Treaty (e.g. protection of the environ- the current state of uncertainty on this core ment, consumer protection) which may in issue of Community law is unsatisfactory. given circumstances be no less legitimate In the course of the legislative process and no less powerful than those mentioned leading to the adoption of the contentious in the Treaty. The analysis should therefore rules the Finnish authorities were aware of be based on whether the ground invoked is the Court's judgments in Bachmann and a legitimate aim of general interest and if so Commission v Belgium. They were uncer- whether the restriction can properly be tain however — as is shown by the tra- justified under the principle of propor- vaux préparatoires submitted to the tionality. In any event, the more discrimi- Court — whether according to those judg- natory the measure, the more unlikely it is ments overtly discriminatory rules might be that the measure complies with the prin- justified in order to preserve fiscal coher- ciple of proportionality. Such a solution ence. It is apparent that that type of would be consistent with the Court's uncertainty can cause governments, com- implicit approach in most of the recent panies and citizens substantial economic cases on freedom to provide services. I damage. would add that the same solution may be appropriate for the free movement of goods. That solution would meet the need to give equal weight, when assessing restrictions on the free movement of goods, to interests no less vital that those set out in Article 30 EC, notably the protection of the environment. 24

41. Since I consider that it is proper not to their view the Finnish tax system is based draw a rigid distinction between the on the same connection between the deduc- grounds of justification for discriminatory tibility of voluntary pension insurance and non-discriminatory measures I will contributions and the liability to income deal with the four grounds invoked. tax of the pensions payable by the insurers. The loss of revenue resulting from the deduction of contributions is in principle offset by the taxation of pensions at a later stage. Referring to the recent Commission Communication on 'The elimination of tax obstacles to the cross-border provision of occupational pensions' 25 the two Govern- ments state that the Finnish system encour- The need to preserve the coherence of the ages savings and the making of retirement Finnish tax system provision by providing a tax deferral on the contributions paid; it thus helps to cope with demographic ageing as it reduces tax revenues today in exchange for higher tax revenue at a later stage. 42. It will be recalled that in Bachmann and Commission v Belgium the Court accepted that restricting the deductibility of contributions paid to foreign institutions might be justified by the need to preserve the coherence of the Belgian tax system. The Court's judgment was based on the assumption that there existed under Belgian law a direct connection between the deduc- 44. The Finnish Government states that it tibility of contributions and the liability to taxes not only the pensions paid by Finnish tax on sums payable by the insurers under and foreign institutions to residents (resi- pension and life assurance contracts: under dence taxation) but also, according to the Belgian system the loss of revenue Paragraph 10 of the TVL, pensions paid resulting from the deduction of insurance by Finnish institutions to non-residents contributions was offset by the taxation of (source taxation). Where a taxpayer has pensions, annuities or capital sums payable paid contributions to a Finnish undertaking by the insurers; where such contributions there is thus a guarantee that the pension had not been deducted the sums payable by payable will be taxed in Finland even where the insurers were by contrast exempted the taxpayer moves abroad. The same from tax. guarantee does not however exist where the departing taxpayer has paid contribu- tions to a foreign undertaking. In order to preserve the coherence of the Finnish tax system pension contributions to foreign insurance undertakings should therefore not be deductible. 43. The Finnish and Danish Governments submit that the rules in issue in the present case can be justified on similar grounds. In 25 — OJ 2001 C 165, p. 4.

48. In the present case there is in my view no true direct link between the deductibility of contributions and the taxation of pen- sions. Under the Finnish tax system the pensions payable by foreign insurance 46. I am not convinced by those arguments undertakings to residents in Finland will and agree with Mr Danner, the Commis- be taxed, independently of whether the sion and the EFTA Surveillance Authority contributions paid to those undertakings that in view of the design of the Finnish were deductible. If Mr Danner stays in income tax system the Finnish Government Finland, the pensions which he will receive cannot invoke the need to preserve fiscal from the two German schemes will be coherence and that the rules in issue in any subject to Finnish income tax despite the event infringe the principle of proportional- fact that he is not allowed to deduct the ity. contributions paid to those schemes. In that respect the Finnish system is asymmetric and differs in a crucial point from the symmetrical system which the Court assumed to exist in Bachmann and Com- mission v Belgium. Since in respect of taxpayers such as Mr Danner there is no direct link between deductibility and tax- 47. It is worth noting that as a preliminary ation, I consider that Finland cannot invoke point that the very notion of fiscal coher- the need to preserve fiscal coherence. ence introduced by the Court in Bachmann and Commission v Belgium has been 27 — See for example B. Knobbe-Keuk, 'Restrictions on the fundamental freedoms enshrined in the EC Treaty by discriminatory tax provisions — ban and justification'. EC Tax Renew 1994, p. 74; D. Fosseland, 'L'Obstacle 26 — Those submitting observations state that the Netherlands fiscal à la réalisation du marché intérieur', diìners de have introduced such a mechanism. Droit Européen 199.1, p. 472.

'The effect of double-taxation conventions which, like the one referred to above, follow the OECD model is that the State 50. Second, it follows from the Court's taxes all pensions received by residents in judgment in Wielockx 28 that in the present its territory, whatever the State in which case fiscal coherence is secured by a bilat- the contributions were paid, but, con- eral convention concluded with Germany. versely, waives the right to tax pensions received abroad even if they derive from contributions paid in its territory which it treated as deductible. Fiscal cohesion has not therefore been established in relation to one and the same person by a strict

51. Under Article 21 of the convention 29 — Convention of 5 July 1979; the German version is published in BGBl. 1981 II, p. 1165. between Finland and Germany for the 30 — As annuities based on previous contributions, see avoidance of double taxation on income K. Vogel, Klaus Vogel on Double Taxation Conventions (3rd ed., 1997), Kluwer, p. 1072. 31 — Since it is not clear whether the pensions payable by the two German schemes would fall under Article 21 or Article 18(2) of the convention I must take both alter- 28 — Case C-80/94 [1995] ECR i-2493. natives into account.

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correlation between the deductibility of strict correlation between the deductibility contributions and the taxation of pensions of contributions and the taxation of pen- but is shifted to another level, that of the sions but is shifted to another level, that of reciprocity of the rules applicable in the the reciprocity of the rules applicable in the Contracting States. Since fiscal cohesion is two contracting States. An overtly discrimi- secured by a bilateral convention concluded natory refusal of a deduction for contribu- with another Member State, that principle tions to foreign pension insurance does not may not be invoked to justify the refusal of serve to protect that different type of fiscal a deduction such as that in issue.' 32 coherence.

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ventions to which Member States are of the restriction is perfectly illustrated by parties (even if not with every other Mr Danner's case: he is not allowed to Member State). The rationale of the Wie- deduct the contributions to the German lockx judgment applies by virtue of the schemes despite the fact that he has strong existence of that general network, which attachments to Finland and is therefore — demonstrates that Member States are gen- as he convincingly explained ·— unlikely erally content to renounce on the basis of to leave Finland merely for fiscal reasons reciprocity the right to tax at source (he added that in any event it was inaccur- pensions paid to persons resident in ate to regard Germany as a fiscal paradise). another Member State. Consequently a person who has been able to deduct pension contributions from his taxable income in one Member State but sub- sequently moves to another Member State will often not be liable to pay tax on his pension in the first Member State. More- over a person who has been able to deduct The need to ensure the effectiveness of in Member State A contributions to a fiscal supervision and to prevent tax pension scheme in Member State B might evasion (fraude fiscale) draw his pension in Member State C and be liable to pay tax on his pension neither in A nor in B but in C. The argument based on fiscal coherence is therefore not made out. 58. The Finnish and Danish Governments argue that the refusal to allow deduction of contributions to schemes operated by foreign insurance institutions is justified by the need to ensure the effectiveness of fiscal supervision and to prevent tax evasion.

63. It is settled case-law that the effective- ness of fiscal supervision constitutes an overriding requirement in the general inter- 61. According to those Governments those est capable of justifying a restriction on the difficulties of monitoring the fulfilment of exercise of fundamental freedoms guaran- the conditions for deductibility and the teed by the Treaty. 34 The need to prevent payment of pensions are due, first, to the fiscal evasion coincides in the present case fact that, whilst the Finnish authorities can with the need to guarantee effective fiscal impose an obligation on domestic institu- supervision. tions to inform the tax authorities of any payment, they have no such powers as regards insurers established abroad. Sec- ond, whereas a taxpayer seeking to deduct contributions to foreign schemes has an interest in providing all required infor- mation, there is no comparable incentive 64. Finland seeks to protect through the for a taxpayer to provide full and precise contested measures two different fiscal information on subsequent modifications interests. of the insurance contract or on the pensions and benefits received from abroad. Third, exchange of information between Member States as provided for by Council Directive 77/799/EEC of 19 December 1977 con- cerning mutual assistance by the competent authorities of the Member States in the 65. First, Finland wishes to ensure that no field of direct taxation 33 is also not a deduction is granted in cases where there is sufficiently effective tool to overcome the no entitlement to such a deduction (effec- difficulties involved.

66. As regards that first interest it is clear 68. It is true that in Bachmann and Com- from Bachmann and Commission v Bel- mission v Belgium the Court accepted that gium that a Member State may invoke the measures there in issue were propor- Directive 77/799/EEC 36 in order to check tionate in that it was not possible to ensure whether payments have been made in the coherence of the Belgian system by less another Member State, where it is necess- restrictive measures. However, in view of ary for those payments to be taken into the severity of the restriction in issue, it is account in order correctly to assess the necessary to examine afresh the propor- income tax payable. In any event, the tax tionality of the Finnish measure in the authorities may demand from the taxpayer context of the present case. such proof of payment of the contributions and of the conditions governing the pension insurance as they consider necessary and refuse, where appropriate, to allow the deduction where such proof is not forth- coming. Since the deduction is conditional upon the approval of the authorities there is 69. As to the severity of the restriction it a strong incentive for the taxpayer to must be borne in mind that the effect of the provide accurate and full information. It measure is likely to be to exclude foreign follows that even where the Member State insurance institutions altogether from the Finnish market. It is thus a measure designed not to ensure effective control of 35 — As regards the question whether the deductibility can be cross-border insurance provision, but to made conditional on such requirements where a worker moving temporarily to another Member State is concerned see the discussion in the Commission Communication, cited in note 25, point 3.4. 37 — See paragraphs 18 to 20 of the judgment in Bachmann, 36 — The Court refers to Article 1(1) of the Directive. cited in note 2.

72. Second, the Member States could engage in an exchange of information on benefits paid by pension institutions to 70. As regards the possibility of safeguard- residents of another Member State which ing the application of Member States' tax would allow Member States to verify com- rules by means less restrictive than the de pliance by their residents with their tax facto elimination of all cross-border pen- obligations. The framework for such an sion insurance services, the tax authorities exchange of information already exists of the Member States may, in my view, rely under Directive 77/799/EEC. In its Com- on three potential sources of information, munication quoted above the Commission namely the taxpayer concerned, the makes detailed proposals for a workable Member State of the paying institution automatic information exchange on occu- and perhaps most importantly the paying pational pensions. 38 insurance institution itself.

74. Third, and perhaps most importantly, effective fiscal supervision or to prevent tax it seems to me that a Member State can evasion. ensure that insurance undertakings estab- lished abroad cooperate and provide the necessary information about the payments which they make to residents. A Member State may for example make the deducti- bility of contributions to a given foreign institution scheme conditional on a prior arrangement between that institution and the authorities of the Member State con- cerned. In such an arrangement the Member State could require the provision of full and accurate information about the The need to preserve the integrity of the tax pension payments made by that institution. base It could also be agreed that the insurance conditions are not to be substantially modified when the deductions have already been granted. It should be assumed that insurance institutions — which are, after all, generally undertakings of some stand- ing and permanence closely supervised by their State of establishment — will not try to breach or circumvent such arrange- 76. The Danish Government argues that ments. But even in the event of non-com- the restriction of the right to deduct con- pliance it would be open to the Member tributions paid to foreign institutions is State to apply appropriate sanctions such as justified by the need to preserve the integ- for example an immediate suspension of rity of the tax base. In its view the Court deduction in respect of contributions paid recognised in Safir that that need consti- by residents.40 Even a rigorous policy of tuted an overriding requirement in the excluding from a Member State's market general interest. If insurance contributions those foreign institutions which do not paid to foreign insurers were deductible, cooperate in good faith would clearly be residents in Member States with high less restrictive than a policy of de facto income taxes would have a very strong excluding all foreign institutions from the incentive to take out insurance with insti- market. tutions established in Member States with low income taxes. That would entail fiscal forum shopping, abuse and circumvention of tax rules in Member States with high income taxes and a race to the bottom in the field of taxation with devastating con- sequences for Member States which finance high quality social services through tax revenue. Furthermore, Member States have 75. Accordingly, the contested measures a legitimate interest in not granting the cannot be justified by the need to ensure fiscal advantage of deductibility of insur- ance contributions where the savings encouraged by the deduction are made 40 — P. Farmer and R. Lyal, EC Tax Law (1994), p. 333. abroad.

77. I am not convinced by those arguments. as those at issue are essentially there to protect insurance institutions established in one Member State against competition from other Member States. It must however be recalled that the fundamental freedoms of the Treaty are designed to preclude not 78. I do not accept that the Court has only restrictions on the purchase of goods recognised the need to ensure the integrity or services from other Member States but of the tax base as a legitimate ground of also incentives devised by the Member justification. The Court has held on the States to encourage the purchase of pri- contrary that preventing a reduction of tax marily national goods or services to the revenue is not one of the grounds listed in exclusion of goods or services from other Article 46 EC and cannot be regarded as an Member States. 42 overriding requirement in the general inter- est. 41 In Safir the Court merely stated that in the circumstances of the case the need to fill a fiscal vacuum was not such as to justify the restrictive national measure in issue. 81. Accordingly, since measures such as those in issue in the main proceedings cannot be justified on any of the grounds invoked they are prohibited by Article 49 79. In any event, the Danish Government's EC. 'race to the bottom' argument appears to be based on the erroneous assumption that lower income taxes in the State of establish- ment of the foreign pension insurance institution are an incentive for taxpayers to take out pension insurance with institu- tions in that State. Since in the vast majority of cases the pensions paid by those institutions will be taxed by the State Articles 12, 56 and 87 EC of residence of the taxpayer (and not by the source State) at the rates applicable in the State of residence there is, in my view, no tax incentive to take out pension insurance with foreign insurers. 82. In view of the clear result under Article 49 EC and since there has been little debate about Articles 12, 56 and 87 EC before either the referring court or this Court, it seems unnecessary and inappro- 80. The Danish Government's last point priate to examine those provisions. might be read as admittingthat rules such 42 — See, for example, Case C-249/81 Commission v Ireland [1982] ECR I-4005, paragraphs 27 to 29 of the judgement, 41 — Case C-307/97 St Gobam [ 1999] ECR I-6161, paragraph and Case C-21/88 Du Pont de Nemours Italiana [1990] 51 of the judgment. ECR I-889, paragraph 11.