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Germany Clamps Down On Pension Tax Avoidance

by Ulrika Lomas, Tax-News.com, Brussels

18 March 2013


The German tax authorities are reportedly intensifying efforts aimed at tracking down pensioners failing to fulfil their tax obligations.

Claiming that it had access to internal statistics from the German Finance Ministry, Bild magazine said that the tax authorities had so far received 98 million documents from pension insurance companies. In 2008, the tax authorities collected almost EUR21bn (USD27.5bn) in taxes from pensioners, it claimed.

The number of taxpayers paying income tax and in receipt of a pension rose by one million to 2.82 million between 2004 and 2008, marking an increase of over 52%. Revenue from this group rose from EUR7.8bn to EUR20.7bn over the same period, according to the report, which noted that the average annual tax paid by those concerned stood at EUR4,480. The number of pensioners with purely pension-based income reportedly soared over the four-year period, rising from 7,720 in 2004 to 61,149 in 2008, with average annual pension bills standing in contrast at a mere EUR41.

The dramatic rise in the number of pensioners subject to taxation in Germany – and the tax authorities’ heightened interest in this category of taxpayers – is due to changes to the system; the transition to a so-called system of "deferred taxation" (nachgelagerte Besteuerung), whereby benefits are no longer taxed with respect to the interest portion, but with respect to the taxable portion.

Introduced within the framework of the Retirement Income Act, the system of deferred taxation has applied in Germany since 2005 following a decision from Germany’s Federal Constitutional Court. The Court had ruled that the old system was unconstitutional as public service pensions were treated differently to annuities from statutory pension insurance.

Under the new system, the taxable portion of pensions is gradually being increased until 2039. For all pensions that began in 2005, or before January 1, 2005, the taxable portion stood at 50%. The taxable portion increases thereafter by 2% every year to 80% in 2020. From 2021 to 2040, the taxable share is to rise by a further 1% annually until finally pensioners entering retirement in 2040 are required to pay tax on the full amount of pensions (100% taxable portion). The transition to full deferred taxation will then be complete. The taxable portion is currently 66% of taxable income.

TAGS: Finance | tax | pensions | tax avoidance | interest | insurance | retirement | Germany

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