Tax Specifics Regarding the Taxation of Foreign Pensions

If you, as a retiree, want to spend your retirement abroad, there are some important tax specifics to consider. The taxation of pensions abroad is a complex issue that depends on various factors, including international double taxation agreements (DBA) and national tax laws. In this blog post, we explain what specifics exist regarding the taxation of pensions abroad, where your pension will be taxed, and provide a clear example.

What specifics exist regarding the taxation of pensions abroad?

If pensions are paid from Germany to abroad, they are generally subject to limited income tax liability in Germany according to § 49 Abs. 1 Nr. 7 EStG. However, there are specifics and exceptions that are regulated in double taxation agreements (DBA). A DBA can exclude Germany from taxing the pension or allocate taxation between Germany and the country of residence.

Double Taxation Agreements (DBA)

The double taxation agreements (DBA) regulate the distribution of the tax burden between the two states and offer two methods to avoid double taxation. Under the exemption method, the pension remains tax-free in the residence state and is only taxed in Germany. In contrast, under the credit method, the tax paid in Germany is credited against the tax payable in the residence state.

Some countries have special regulations. For pension payments from the statutory social insurance, the treasury state principle applies according to many DBAs, which assigns the taxing right to Germany. Newer DBAs, such as the one with Spain, provide for a limitation of the withholding tax, e.g., to 5% from 2015 and to 10% from 2030.

Where must I tax my pension?

The taxation of your pension depends on various factors:

Type of pension: Is it a statutory pension, an occupational pension plan, or a private pension?

Your country of residence: What country is your new residence and what double taxation agreements exist between this country and Germany?

Duration of contribution payment: In some cases, such as with certain forms of occupational retirement provision, the taxing right of the source state applies if contributions have been tax-privileged for at least 15 years.

Example

Facts

Mr. Schmidt, a German retiree, has relocated his residence to Austria and receives a pension from the German Pension Insurance Fund based in Berlin.

Solution

According to Art. 18 Abs. 2 DBA-Austria, Germany has the taxing right for the pension. This leads to limited tax liability and assessment of income tax in Germany according to § 49 Abs. 1 Nr. 7 EStG. Therefore, Mr. Schmidt must tax his pension in Germany, even though he resides in Austria.

Further Specifics

For pension recipients abroad, the tax office Neubrandenburg conducts the assessment. Normally, pension recipients must submit a tax declaration; however, the tax office Neubrandenburg often waives this obligation and establishes the tax in the so-called official assessment procedure. Pension recipients can object to this procedure if they wish to be treated as unlimited tax liable.

Conclusion

The taxation of pensions abroad is complex and requires a careful review of the relevant double taxation agreements and national tax laws. It is important to inform yourself early and, if necessary, seek expert advice to avoid tax disadvantages.

Would you like to learn more about the tax implications of your emigration? Contact us for personalized advice. This way, you ensure that your pension is optimally taxed and that you experience no tax surprises!

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