According to the CJEU, the higher tax for dividends received by foreign pension funds is in breach of the Treaty

In a recent judgment handed down on November 13, 2019, the EU court of justice (CJEU) has concluded that the higher (withholding) tax in Germany for a Canadian pension fund in comparison with the taxation (virtual exemption) of German funds is precluded by EU law, at least when the nonresident fund also reserves the dividends to constitute provisions for the payment of future pensions. For German pension funds the reserved amounts were used to reduce their taxable income. Besides, they also received a refund of the withholding tax they had previously incurred. All of this combined meant a virtual exemption from German taxes. Nonresident pension funds, by contrast (including those from third countries), incurred a final withholding tax equal to 15% on an amount that did not qualify for any deductions for the provisions eventually booked.

In its judgment, the CJEU recalled that, after determining that the objectives and functioning of the German and foreign funds are essentially similar (in this case, by reserving the dividends for the payment of future pensions), the fact that Germany exercises its taxing powers over both resident and nonresident funds places them in a comparable situation. In view of this, the different tax treatment is discriminatory and restricts the free movement of capital.

On the potential justification for that restriction, the CJEU concluded that the need to ensure a balanced allocation of taxing powers between Member States and third countries cannot be taken as a valid justification in this case. Nor can it be considered that the case involves a restriction that existed on December 31, 1993 for the purpose of applying article 64.1 of the Treaty (allowing the application of restrictions existing on that date vis-à-vis third countries), because the specific legislation on the taxation of pension funds was introduced in Germany in 2002.