Are German DRV pensions being subject to double taxation?

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I have often wondered whether the way in which pensions are being taxed in Germany since 2005 is leading to some form of double taxation (contributions in whole or in part from taxed income but pension taxed, apart from a tax-free percentage reducing from 50% to nil by 2040. And annual inflation increases taxed in full).  It turns out that the Bundes­finanzhof in München may be hearing a couple of cases on this point and considering whether the issue breaches the constitution.  Has anyone picked up on this and what is the feeling among professionals in terms of the likely outcome?

 

In our case it seems there must be a high level of double taxation as all contributions were paid in the 1980s, which I think means they were out of taxed income (not sure if there was no or partial relief for pension contributions of employees in those days?) but about 80% is taxed now we are entering our doting years and claiming our pensions.  One will lead to tax being actually payable in 2022 and the other one starts in that year and will lead to tax payable from the start.  Should I keep my eye on this issue, or is it just noise from people promoting their own services/products?

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Have you checked the agreement on the avoidance of double taxation between your home country and Germany?

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Nothing to do with that - these cases are looking at whether the reform of taxation of German pensions in 2005 resulted in double taxation within Germany for German tax residents of their pensions.  The contention is that because contributions during working life were wholly or partly out of taxed income and then that same amount or some of that amount (not simple but that is the thrust of the argument) is taxed again when you draw down on the pension.  And that, they say, breaches the constitution.  Way out of my comfort zone...

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22 hours ago, GaryC said:

Nothing to do with that - these cases are looking at whether the reform of taxation of German pensions in 2005 resulted in double taxation within Germany

Sorry, I had jumped to the conclusion that you were talking about a UK pension.

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1 hour ago, jeba said:

Sorry, I had jumped to the conclusion that you were talking about a UK pension.

No problem - easy to do a that would normally be the issue

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I started this tread to prompt thought and discussion but clearly it is too geeky.  However, having had the subject presented to me today in that list of possible searches Google offers, it sparked my interest again and I thought, why not, it might give some certainty and clarity...

 

Anyway, if the articles are to be believed, it seems this is apparently the talk of the town across the whole country (well, perhaps a close second behind Covid) and the FA is allegedly applying bullying tactics to get pensioners to rescind their appeals against their tax assessments on this issue - if true that is appalling!  Anyway, the bottom line seems to be that people should consider lodging appeals against their assessments to protect their rights in the event the various court cases are settled in the claimant's favour.

 

So, are other people following this and talking with their Steuerberater about the need or desirability of appealing to protect their rights, or, as mentioned above, is this just noise from people promoting their own services/products?

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2 hours ago, GaryC said:

So, are other people following this and talking with their Steuerberater about the need or desirability of appealing to protect their rights, or, as mentioned above, is this just noise from people promoting their own services/products?

 

All Steuerberater are automatically doing Einsprüche because of this, it's a known problem.

 

I don't know about Lohnsteuerhilfevereine, but you can't expect too much from them, their work is more assembly line, little tolerance for unusual cases and very little time to spend on each case, so they rarely do Einsprüche.

For people who don't have a Steuerberater to do the Einspruch for them, you can use the sample Einspruch contained in this article (the Einspruch was drafted by Heinrich Braun, the Steuerberater who brought this case all the way to the BFH - Bundesfinanzhof, Germany's highest financial court): https://www.fr.de/wirtschaft/rente-doppelbesteuerung-deutschland-steuerbescheid-einspruch-muster-vorlage-frankfurt-90206450.html

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Great, thanks - that was the article I was reading earlier but decided not to link to it.  I live in hope that it will be all sorted before either of us has to actually pay € to the FA, which will be by ref to 2022 but I am probably being over-optimistic...

 

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Still watching this issue unfold and see the next hearing is scheduled for May. 

 

This got me wondering how German contributions were treated before the 2005 changes. Were they in any shape or form tax deductible or out of taxed income?  I cannot recall claiming deductions in my tax returns from those days (I did them myself so may have missed a trick) but they have long-since seen the wrong side of the shredder. And I have no idea how they were dealt with in payslips and they too have long-since been shredded, some 34 years after we left Germany...

 

Just wondering because all of my, and my wife's, contributions were made in the 1980s and UK NIC is not tax deductible, so any impact of the UK years on the German calculations would also be out of taxed income... 

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1 hour ago, GaryC said:

This got me wondering how German contributions were treated before the 2005 changes. Were they in any shape or form tax deductible or out of taxed income? 

 

I think they introduced them being (partly) tax-deductible in 1993, see §10 (3) EStG in here: http://archiv.jura.uni-saarland.de/BGBl/TEIL1/1993/19932311.1.HTML

The amounts in there are in DM, but they used the same amounts up to 2004, for years after the € was introduced, they simply converted them with the fixed rate 1€ = 1.95583 DM:

 

Here is the DM version of §10 (3) EStG:

(3) 9 Für Vorsorgeaufwendungen gelten je Kalenderjahr folgende Höchstbeträge:

1. ein Grundhöchstbetrag von

2610 Deutsche Mark,

im Fall der Zusammenveranlagung von Ehegatten von

5220 Deutsche Mark;

2. ein Vorwegabzug von

6000 Deutsche Mark,

im Fall der Zusammenveranlagung von Ehegatten von

12000 Deutsche Mark. 10

2 Diese Beträge sind zu kürzen um 16 vom Hundert der Summe der Einnahmen

a

.) aus nichtselbständiger Arbeit im Sinne des § 19 ohne Versorgungsbezüge im Sinne des § 19 Abs. 2, wenn für die Zukunftssicherung des Steuerpflichtigen Leistungen im Sinne des § 3 Nr. 62 erbracht werden oder der Steuerpflichtige zum Personenkreis des § 10 c Abs. 3 Nr. 1 oder 2 gehört, und

 

b.) aus der Ausübung eines Mandats im Sinne des § 22 Nr. 4;

3. für Beiträge nach Absatz 1 Nr. 2 Buchstabe c ein zusätzlicher Höchstbetrag von 360 Deutsche Mark für Steuerpflichtige, die nach dem 31. Dezember 1957 geboren sind;

4.

Vorsorgeaufwendungen, die die nach den Nummern 1 bis 3 abziehbaren Beträge übersteigen, können zur Hälfte, höchstens bis zu 50 vom Hundert des Grundhöchstbetrags abgezogen werden (hälftiger Höchstbetrag).

 

And here the 2004 version, with €:

 (3) 1Für Vorsorgeaufwendungen gelten je Kalenderjahr folgende Höchstbeträge:

 

1. ein Grundhöchstbetrag von 1 334 Euro,
  im Fall der Zusammenveranlagung von Ehegatten von 2 668 Euro;
2. ein Vorwegabzug von 3 068 Euro,
  im Fall der Zusammenveranlagung von Ehegatten von 6 136 Euro.
  2Diese Beträge sind zu kürzen um 16 vom Hundert der Summe der Einnahmen
  a.) aus nichtselbständiger Arbeit im Sinne des § 19 ohne Versorgungsbezüge im Sinne des § 19 Abs. 2, wenn für die Zukunftssicherung des Steuerpflichtigen Leistungen im Sinne des § 3 Nr. 62 erbracht werden oder der Steuerpflichtige zum Personenkreis des § 10c Abs. 3 Nr. 1 oder 2 gehört, und
  b.) aus der Ausübung eines Mandats im Sinne des § 22 Nr. 4;
3. für Beiträge nach Absatz 1 Nr. 2 Buchstabe c ein zusätzlicher Höchstbetrag von 184 Euro für Steuerpflichtige, die nach dem 31. Dezember 1957 geboren sind;
4. Vorsorgeaufwendungen, die die nach den Nummern 1 bis 3 abziehbaren Beträge übersteigen, können zur Hälfte, höchstens bis zu 50 vom Hundert des Grundhöchstbetrags abgezogen werden (hälftiger Höchstbetrag).

 

The calculation schemata, i.e. by how much you got to lower your taxable income through the public pension contribution can be found in here, under "9. Günstigerprüfung": https://www.smartsteuer.de/online/lexikon/v/vorsorgeaufwendungenaltersvorsorgeaufwendungen/#D063090900059

 

*******************************************************************

 

I find it more interesting to look at what the social security pensioners "lost" through the introduction of "nachgelagerte Besteuerung" from 2005.

Before the state pension a social security pensioner could get without having to pay any tax was much higher: http://dip21.bundestag.de/dip21/btd/13/056/1305685.pdf

See here how much a social security pensioner (not a civil servant pensioner!) could get tax-free per year (in DM), see the green box:

 

608c71d13295d_2021-04-3023_07_30-Window.

 

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Not sure I quite follow all of this (will need a while to get my head round the various documents and language) but as our contributions stopped in 1988, my guess is they were all out of taxed income.  What that will all mean after the next judgement remains to be seen of course but at least there is a thread here to refer back to...

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Never did get my head round the above but it looks like the Court has opined, though I am not sure I quite follow (aka understand) all of the language used.  If I read X R 33/19 correctly (and I think this is the judgement that has the greater potential to impact on our position), only the Rentenfreibetrag can be taken into account when looking at what amounts of the pension will and what will not be taxed over ones expected life span (and that of the statistically expected surviving spouse for the widow(er)'s pension).  Grundfreibetrag etc must be left out of the calculation.  One must then compare that expected tax-free amount of the pension of the person's expected life span, with the total of contributions they made out of taxed income over the period to 2004.  If the former is at least as high as the latter, then no double taxation arises. The general expectation appears to be that for those who are 49 or older (i.e. those covered by the transitional rules), there will be no double taxation of their pension income but each case stands on its own facts, so there can be exceptions to that general expectation.  For those 48 or younger, the position is far less clear and double taxation is likely.  Policymakers will need to change the law.

 

What I am not clear on is how that all impacts our position.  The tax-free element of the pension is easy to establish as it is the amount calculated in the first full year of the pension multiplied by expected number of years from drawing the pension to death.  So, for my wife, and in simple terms, that would be 993€ x 20, given that life expectancy of women is about 83 and she drew the pension at 63. (let's ignore the fact that she will be the statistical recipient of a widow's pension for about 3 years - too complicated at this stage). So, her tax-free pension will amount to, give or take, 20,000€.  But what is that compared to?  Is it the actual contributions made in the late 1970s and most of the 1980s (i.e. all before 2005) and where does one obtain those amounts?  Is any account taken of inflation (my reading is that is isn't but I was struggling to follow the text)?  If not, then won't the answer always be "no double taxation"?  e.g. on the basis that the DM/€ rate was set at, give or take, 2DM=1€, 20,000€ would equate to about 40,000DM, which, according to her Versicherungsverlauf, was about the same as one of her best earning years, so pension contributions on that would have been a fraction of that amount.  her 8 or so years of contributions is therefore likely to be a lot less than 40,000DM...

 

So, what is the Steuerberater community making of all this and is it even worth taking the computation further than above, even for those with simple affairs where everything happened pre-2005 and the person(s) had only a "simple" employment, making contributions from their salary as required for pension, tax, KK etc?

 

 

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1 hour ago, GaryC said:

The general expectation appears to be that for those who are 49 or older (i.e. those covered by the transitional rules), there will be no double taxation of their pension income but each case stands on its own facts, so there can be exceptions to that general expectation.  For those 48 or younger, the position is far less clear and double taxation is likely.

Well, I turned 50 this year, so most likely no double taxation for me. Finally, a tax break for me coming up.

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1 hour ago, LukeSkywalker said:

Well, I turned 50 this year, so most likely no double taxation for me. Finally, a tax break for me coming up.

Not sure whether it is a real tax break or not given how the calculations are done.  If all of our contributions were out of taxed income in the 1980s, then how can any of the pension be taxable, yet still result in no double taxation?

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Because you're forgetting that the employer also paid in as much to public pension insurance as you did and the employer's contribution was tax-free.

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3 minutes ago, PandaMunich said:

Because you're forgetting that the employer also paid in as much to public pension insurance as you did and the employer's contribution was tax-free.

Combination of not knowing and forgetting - it's a long time since I was working in Germany, lol.

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