Pension funds should be exempt from a European directive that sets out rules to prevent the misuse of shell entities for tax purposes, according to PensionsEurope.

In feedback to the European Commission on its proposal for a council directive to lay down such rules, amending Directive 2011/16/EU (COM(2021) 565, PensionsEurope said it supports the aim of preventing the use of legal entities and arrangements without minimal substance for tax avoidance or tax evasion purposes.

However, the association said that certain adjustments to the proposal are “necessary” to ensure that pension funds and the investment structures they use do not incorrectly fall within the scope and be impacted unintendedly.

“First, although in practice pension funds would not pass the envisaged gateway criterion as they do not present any risk of lacking substance for tax purposes, we believe they should anyway be excluded from the scope for purposes of legal certainty. In our opinion, all pension funds should be included in the exemption from the scope of application of this Directive provided by Article 6.2, which excludes from the envisaged rules some entities that do not present tax avoidance risks, including ‘regulated financial undertakings’,” the association said.

PensionsEurope noted that the proposal states that: “It would be fair to exclude from the envisaged rules undertakings whose activities are subject to an adequate level of transparency and therefore do not present a risk of lacking substance for tax purposes. Companies having a transferable security admitted to trading or listed on a regulated market or multilateral trading facility as well as certain financial undertakings which are heavily regulated in the Union, directly or indirectly, and subject to increased transparency requirements and supervision, should equally be excluded from the scope of this Directive.”

Furthermore, Article 6.2 further specifies the ‘regulated financial entities’ by listing them. Although occupational pension funds are defined in the Directive (EU) 2016/2341 on the activities and supervision of institutions for occupational retirement provision (IORPs), it does not list entities providing personal pension products.

“Considering the reasons for excluding IORPs and, in general, all regulated financial undertakings, we believe that entities providing personal pension products regulated at national level should also be listed. The current wording of the exemption does not cover all possible regulated pension schemes arrangements existing at the national level. We note that other EU legislation such as EMIR1 or PRIPPs2 recognise the specificities of all pension schemes. Therefore, we would suggest the inclusion of a new letter in article 6.2 of the Proposal within the definition of “regulated financial undertakings” with a wording similar to that foreseen in the EMIR.”

In addition, PensionsEurope believes that certain investment structures/entities used by alternative investment funds, such as private equity funds, should also not fall under the scope of the proposed directive.

“These structures are used by pension funds (and other institutional investors) to ensure tax neutrality, to have more flexibility in choosing the preferred risk and structure of the investment, to facilitate easier exit and create greater returns for their members and beneficiaries, and to have more certainty regarding insulation from legal liabilities. Including these entities within the scope would negatively impact on the ability of pension funds to invest in the EU economy and reduce the various benefits currently provided by these structures, ultimately resulting in less investment opportunities and less returns for pension funds and their members and beneficiaries,” PensionsEurope said.

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