Germany: Plans to Reform Pension Taxation

Germany: Plans to Reform Pension Taxation

On Monday 31st May 2021, Germany’s Federal Fiscal Court, the Bundesfinanzhof, demanded changes to pension taxation in order to avoid the double taxation of future retirement savings.

Responding to the demand, Germany’s Federal Ministry of Finance (BMF) plans to reform the taxation of pensions following September’s federal election. After the court dismissed one married couple’s double taxation complaint, State Secretary, Rolf Boesinger, stated that future pensioners were at risk of having to pay taxes twice under existing transitional regulations and that this is a proposed solution that they can imagine.

The BMF envisaged that before 2025, contributions to statutory and private pensions during a person's working life will be fully tax deductible. As it stands, 92% of them can be deducted.

Pensions had basically been exempt from tax prior to 2005 due to contributions coming from taxed salaries. In 2005, under a law change, pension contribution payments gradually became tax free. Despite this, the taxable share of the pension increased, therefore there is the possibility of double taxation during the transition period if the tax-exempt portion of the pension if less than the contribution made earlier from taxed salaries.

The married couple mentioned above were assessed together in 2009 for income tax purposes and filed a complaint against the rules, claiming that their 2009 tax assessment was unlawful. Rejecting the complaint as “unfounded”, the court stated that the plaintiffs had not been violated of their rights.

Despite rejecting the complaint, the court then demanded a change in the taxation system, resulting in the BMF planning to reform pension taxation following the September federal election.

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