Germany’s General Fiscal Court (BFH) has rejected double taxation challenges brought by two retirees, but the court said the law must be amended to protect future pensioners from being taxed twice on the same income.
In a pair of cases (XR20.19.0 and XR33.19.0) decided May 19 but not published until May 31, the BFH rejected claims related to Germany’s transition away from an “upstream” system of pension taxation, under which contributions to the public pension system generally are taxable, while benefits are not. Legislation that went into effect in 2005 required the phasing in over 40 years of a “downstream” system, under which pension contributions generally will be made tax exempt while benefits become taxable.
Retirees who received their first pension payment before 2005 were allowed a 50 percent tax allowance, said Brigitte Stelzer of Ebner Stolz in Stuttgart. “This tax allowance decreases each year [for] pensioners receiving their first pension, leading to, for example, a tax allowance of 19 percent for pensioners receiving their first payment in 2021 and 0 percent for those retiring in 2040,” she said.
The BFH said the total amount of tax-exempt benefits cannot be less than the total amount of contributions made on an after-tax basis.
Tobias Hentze of the German Economic Institute, a Cologne-based think tank, said the BFH’s rejection of the taxpayers’ challenges was only a “superficial” victory for the government. “In fact, it is a mandate to finally take action,” he said in a May 31 posting on the institute’s website. “According to the current legal situation, all those who are gainfully employed today and retire after 2040 have to pay taxes twice: once on part of their pension contributions and later once [again] on their pensions. Many retirees who have recently retired or are about to retire may also be affected by double taxation. The Federal Fiscal Court has now admitted this injustice, even though it dismissed the challenges since there is no double taxation in the cases to be decided.”
Hentze told Tax Notes that while only 90 percent of his contributions were tax deductible in 2020, 100 percent of the pension benefits he receives will be subject to tax if he retires in 2060. “That’s my personal situation, but it depends on each case,” he said. “Whether there is double taxation depends on the number of years you worked, whether you are married or not, the amount of the pension, etc.”
The government had argued that the basic tax allowance of approximately €10,000 a year granted to every adult effectively means that pensioners are not subject to double taxation. “The government said that if you aren’t paying tax, you aren’t suffering from double taxation,” Hentze said. “The court said the allowance isn’t allocable to pension payments.”
Rolf Boesinger, state secretary in the Ministry of Finance, said May 31 that the government will prepare legislation to address the double taxation issue after parliamentary elections scheduled for September 26.
Hentze said there are two options available to the government, both of which he considers necessary to resolve the problem. The first is to slow the increase of the amount of taxable pension income, which currently stands at 81 percent, from 1 percentage point a year to half a point. The second option involves the deductibility of pension contributions. “Increasing the amount deductible will only apply through 2024 because from 2025 onward, 100 percent of contributions will be deductible under current law,” he said. “That would cost between €20 billion and €22 billion. Combined, this would bring the total cost for the period from 2020 to 2040 to around €90 billion.”
Stelzer said the government’s decision to put off addressing the issue until after the elections was not political. “As there was no ruling against the taxation of retirement income . . . as unconstitutional, the German government is not forced to reform the provision within a specific period,” she said. “Additionally, it would be close to impossible to pass a law before the elections in September because the procedure to pass a law usually needs some months.”