German Pension Tax Proposal Divides Opinion

by Ulrika Lomas, Tax-News.com, Brussels

06 November 2009

Proposed recently by Germany’s Free Democratic Party (FDP), a new tax initiative concerning pensions looks set to stir up yet another heated debate within the Coalition.

Although the Christian Democratic Union party and the FDP pledged recently to simplify the existing system of pension tax in Germany, as part of their Coalition agreement, the latest proposal put forward by the FDP is likely to meet with fierce opposition.

Determined to reduce bureaucracy and rising costs, the FDP have suggested that pension scheme operators automatically deduct tax prior to payment, before then returning the amount to the tax office.

While pension scheme operators, social organizations and tax unions remain highly sceptical, the FDP's finance expert Carl-Ludwig Thiele is convinced that the simplified and improved process would lead to increased legal security for the elderly.

In the last few months, anger has reached fever pitch regarding the taxation of pensions. Prior to the introduction of the 2005 Retirement Income Act, most pensions were tax-free. Subsequently, however, following controversial amendments to the legislation, around half of all pensions in Germany are now taxable.

Given that a large number of pensioners have – unwittingly – failed to return a tax declaration, the State has begun its crack down on 'tax evaders'.

From the beginning of October, pension scheme operators have been required to forward reports on pension income to the tax authorities. As a result, many pensioners now face bills dating as far back as 2005.

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