Double taxation claims rejected by BFH
The reason behind the ruling was that, since 2005, the system for taxing statutory pensions has been changing. This is because while the pensions of German civil servants have to be fully taxed, in the case of statutory pensions, only the so-called ‘earnings portion’ was taxable. This was measured on the basis of the age of the pensioner and related to approximately 27% to 35% of the pension payment that was subject to income tax.
The legal action had been brought by a tax consultant who had been drawing an old-age pension, since 2007, from the German statutory pension scheme. The BFH clarified that there would be no double taxation if the sum of the pension inflows likely to remain tax-exempt is at least as high as the sum of pension contributions made from taxed income.
Interim conclusion: According to the BFH, in the case of the tax consultant there was no double taxation, however, this ruling could have an impact on those who start to draw a pension in the coming years.
Comparative calculation and forecast ...
According to the BFH, the pension tax allowance, which is provided for in the transitional rules, for both the taxpayer’s pension and any survivor’s pension for the spouse who is statistically likely to live longer should be included in the comparative calculation and the forecast for the purpose of assessing if there could possibly be double taxation. By contrast, other tax reliefs, such as e.g., the basic tax-free allowance or the special expense deduction for health and long-term care insurance premiums should not be taken into consideration.
... for the purpose of assessing if there is double taxation
To prevent ‘double taxation’ a comparison is made between the payments into the pension fund that came from income that had been already taxed with the portion of the pension that will be paid out tax-free. Here, the annual pension payment is multiplied by the statistical life expectancy in order to be able to compare both amounts. This is the so-called pension allowance (Rentenfreibetrag) - a fixed Euro amount that is determined once. If this pension allowance is higher than the sum of all the contributions that were paid out of taxed income into the pension fund during working life then there is no ‘double taxation’.
Please note: ‘Double taxation’ would only be deemed to exist if the total amount of pension that was paid out free of tax is lower than the contributions that were paid out of taxed income.
Whether or not there is double taxation depends, in particular, on how big the tax-free portion of the pension (the pension allowance) is. Up to now, when calculating the pension inflows that will remain tax-exempt, the fiscal authority has additionally taken into account the general basic personal tax allowance (currently € 9,744). The BFH has now decided that the basic personal tax allowance must not be included in the calculations. As a result, the tax-free pension contribution will fall and, in this way, it is more likely that there will be double taxation in the future. According to the current forecast and if the pension arrangements remain unchanged, double taxation will become an issue for those who start to draw their pensions from 2025 onwards.
Please note: In another ruling, from 19.5.2021 (case reference: X R 20/19), the BFH clarified, among other things, that in the case of pensions based on private investment products that fall outside of the basic pension (in short, private pensions), which are taxed merely on the respective earnings portion, inherently, there cannot be any double taxation.