Door opened for value transfer of Dutch pension capital

27/11/23

On 19 November 2023, the European Court of Justice issued two long-awaited judgements on the conditions for international value transfer of Dutch pension capital. These judgements have consequences for employees who enter employment within the EU. It also has an impact on employers who temporarily employ their employees in the Netherlands. The Court ruled in two cases that Dutch legislation for international value transfers conflicts with the free movement of employees.

What is an international value transfer?

When changing employment, it is possible in the Netherlands to transfer the accrued pension with the old employer to the pension provider of the new employer without any complications. Such a transfer is common, tax-free and no special conditions apply.

However, if an employee accepts a new employment in another EU Member State, the transfer of the accrued pension is much more complicated. It is virtually impossible to transfer the pension capital from the Netherlands to the pension provider of another EU Member State upon acceptance of an employment in that other Member State. There are conditions that can rarely or never be met in practice.

Background

A value transfer of pension capital to a foreign pension provider is sanctioned with a maximum tax levy of almost 70%. There is no penalty if the employee receives approval from the Tax Authorities for the transfer. Such approval is rarely granted because the employee must meet conditions that are not feasible in practice. The Court focuses on the following two conditions, which are seen as bottlenecks in practice:

Condition 1: The pension scheme of the new employer established abroad cannot have a broader lump sum option than is permitted in the Netherlands. In practice, this condition is experienced as a bottleneck because the lump sum option in the Netherlands is very limited, while in many EU member states the lump sum option is broader. Transfer is therefore usually not possible because this condition is not met. By “lump sum” we mean the option to have the accrued pension paid out other than in a lifelong benefit, for example by means of a single amount payment or a temporary annuity.

Condition 2: In addition, the new (foreign) pension provider must conclude an agreement with the Tax Authorities in which is agreed that, if a “lump sum” is paid, the pension provider is liable for the Dutch tax due. If the new pension provider does not enter into such an agreement, there is an alternative. The employee can provide a guarantee of approximately 70% of the transferred capital. These conditions are not explicitly stated for a transfer within the Netherlands. This means that employees who accept employment elsewhere within the EU are treated differently. According to the Court, there is a distinction between employees who work in the Netherlands and employees who work elsewhere in another EU Member State.

The question is whether there are justifications for the difference in treatment of the two groups of employees. According to the Court, there are no grounds for justification.

Are there any justifications?

The first justification for the restriction of the free movement of workers is the social protection of workers. The Netherlands argues that the first condition, the broader lump sum option, is necessary to protect employees. By imposing a lump sum ban, lifelong pension benefits are guaranteed for employees, because pension entitlements retain their pension destination. In addition, the Netherlands states that there is a risk that the migrant worker will surrender his pension and then later return to the Netherlands without an income. This puts pressure on the Dutch social security system.

The Court confirms that social protection of employees is indeed a justification. However, social protection as a justification must be proven with specific data to substantiate it. Such evidence with an objective, comprehensive and numerical analysis is lacking.

The Court also states that this justification can only be used if it can achieve social protection and the restriction does not go further than necessary. However, according to the Court, this arrangement does go further than is necessary to achieve the stated social protection. Every employee who wants to work in another Member State is affected by the proposed measure, regardless of whether someone can rely on the Dutch social security system.

In addition to social protection, the Netherlands states that the two conditions mentioned also apply to a domestic situation. No distinction is made between employees who change employment in the Netherlands or go abroad. In contrast, the Court states that the measures, which apply regardless of nationality, by their nature affect migrant workers more than national workers and therefore threaten to disadvantage migrant workers in particular. Although the national legislation in question applies without distinction to domestic transfers of pension rights, it may well discourage employees from taking up a new employment relationship in another Member State.

What does this mean for your organisation?

In practice, the judgement means that it will be easier to transfer a Dutch pension abroad when accepting employment elsewhere.

Employees can more easily transfer their pension without being affected by the Dutch lump sum ban.

This judgement also has consequences for employers who temporarily employ employees in the Netherlands. Depending on the employment policy, these employees may or may not be required to participate in a Dutch pension scheme.

This is often seen as an objection by employees, because they only build up a small pension in a relatively short period, which remains in the Netherlands until retirement age because employees cannot access it earlier. These employees will soon have the option to take the accrued pension with them if they exchange the Netherlands for another EU member state. Employers can create policy to help these employees realise the transfer.

For the sake of completeness, we note that this judgement does not automatically mean that pension can no longer be taxed in the Netherlands once it has been transferred. The tax treatment of any pension buyout must be considered on a case-by-case basis.