Top EU Court Rules Italy Can Tax Public Pensions of Expatriates

A man walks by the European Court of Justice in Luxembourg in 2015. (AP Photo/Geert Vanden Wijngaert, File)

LUXEMBOURG (CN) — Italy can tax its citizens’ public sector pensions even if they moved to another country, Europe’s highest court ruled Thursday. 

The European Court of Justice found that having an Italian pension taxed in Italy doesn’t violate expatriates’ freedom of movement and isn’t discrimination.

Two Italian nationals, identified in court documents as H.B. and I.C., brought complaints before Italian courts after their requests to have their public pensions exempted from taxes were denied. Both retirees were told by the Italian National Social Security Institute, which manages their pensions, that the tax exemption only applies to private pensions, not public ones, unless the beneficiary takes the nationality of their new country of residence. 

The pair are not connected to one another. The Luxembourg-based court joined their cases because the facts in the two cases were so similar. The Court of Justice is not holding hearings in light of Covid-19 prevention measures but is continuing to issue opinions on cases it heard before the pandemic struck. 

Both H.B. and I.C. moved to Portugal in 2015 after retiring from jobs in the Italian public sector. The Portuguese tax system entices retirees to move to the country. Under the controversial nonhabitual residency scheme, foreigners who retire to the southern European country can collect their pensions tax-free for the first 10 years and pay a lower tax rate on other sources of income. 

The retirees argued that by refusing to grant the tax exemption, Italy was discriminating against them on the basis of nationality and that their freedom of movement, guaranteed under the EU charter, was being violated. The Italian court referred both cases to the Court of Justice for clarification. 

The seven-judge panel was brief in its decision Thursday, in part because it leaned heavily on case law. 

In its 1998 Gilly decision, the court held that cross-border tax agreements don’t have to guarantee that people pay the lowest amount of taxes, only that they are not double-taxed between member states. In that case, the judges found that a public school teacher who was living in France but working in Germany and paying the higher German tax rate was not being discriminated against. 

“The objective of a bilateral convention for the avoidance of double taxation … is to prevent the same income from being taxed in each of the two parties to that convention; it is not to ensure that the tax to which the taxpayer is subject in one state is no higher than that to which he or she would be subject in the other,” Thursday’s ruling states, using language nearly identical to what the court wrote in the Gilly decision. 

Both H.B. and I.C. also argued that allowing private-sector employees to participate in the tax exemption scheme but denying that opportunity to public-sector employees is discriminatory. But the Court of Justice disagreed, holding that countries are free to set their own rules for tax jurisdiction so long as they don’t violate the double-taxation framework. 

The ruling is final and cannot be appealed. 

Under international pressure, Portugal changed the nonhabitual residency scheme earlier this year. It still carries a tax advantage, though less than under the previous version. 

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