International Tax Challenges For Mobile Employees' Pensions

International mobility continues to increase, yet pensions do not seem to be a big concern. Employees typically continue to contribute to their state pension (social security) and occupational (company) pension where possible, but how are pensions taxed in different countries and why does double taxation often occur? This article covers the international tax challenges of occupational pensions.

How are occupational pensions taxed?

Where occupational pension plans meet certain conditions under the country's tax rules, favourable taxation is often available. These conditions typically relate to the pensionable base, the retirement age and the maximum contribution rate.

When discussing the taxation of pensions, it is good to distinguish three parts: (1) contributions to the pension plan, (2) returns on investment, and (3) distribution of pension benefits. Favourable tax treatment can mean tax-free employer contributions, tax-deductible employee contributions, tax-exempt returns on investment, and/or tax-exempt benefits. A favourable tax treatment typically applies to one or two of these parts, but some countries exempt all three parts (e.g. Bulgaria).

If an occupational pension plan does not meet the conditions for favourable tax treatment, the employer's contributions are generally considered to be taxable income and the employee's contributions are not deductible for income tax purposes. Additionally, the return on investment in these funds is most likely also taxed.

Most countries allow for an exemption of the pension contribution, if the plan meets the conditions stipulated in the country's tax law. The return on investment is mostly exempt as well. For these countries, the pension benefits will generally be taxed upon receipt.

Some countries tax the contributions, but exempt the returns on investment and the pension benefits (e.g. Czech Republic and Hungary). Other countries tax the contributions and the benefits, but exempt the returns on investment (e.g. Belgium and France). Other variations exist as well. The OECD published a report on the tax treatment of pension funds in 2015.1

Luxembourg allows for a deduction of employee contributions in a qualifying pension plan. The employer's contributions are subject to 20% tax, payable by the employer. The return on investment and future benefits are exempt from taxation.

International pension challenges

When employees move internationally, temporarily or permanently, they become subject to a...