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Deductibility of US Pension Plans – "401(k) pension plan"
The plaintiff is of the opinion that the payments into the pension plan are to be deducted for the purpose of determining income when now receiving the pension. Can this be true? This turned out to be such an interesting and relevant question that the Federal Fiscal Court had to deal with it and fell its verdict on October 28, 2020 (re X R 29/18 published on 14 May 2021).
Americans having secured their US Private Pension Plan
The plaintiff was employed in the States from 2005 to mid-2011. It is undisputed between the tax office that the plaintiff was not subject to income tax in Germany until his return in May 2011. During his employment in the USA, the plaintiff participated in a US pension plan ("401(k) pension plan") set up by his employer there. Both the plaintiff and his employer paid the equivalent of €101,968 into the plan. According to the findings of the Tax Court (FG), all contributions remained not subject to taxation under U.S. income tax law.
At the end of the year in dispute, the plaintiff received a distribution of €108,073 from the pension plan. The parties involved are unanimously of the opinion that the payout from the "401(k) pension plan" is a taxable benefit pursuant to §22 no. 5 EStG. The plaintiffs have however the opinion that the payments into the plan are to be deducted for the purpose of determining income. Thus, only the difference is to be taxed. In other words, the defendant only wants the “real earnings” to be taxed.
In the absence of a domestic income tax liability, they could not have made use of the partial tax exemption of the contributions pursuant to §3 no. 63 EStG at any time, which is normal for German contributions. Based on this, the plaintiff declared an income of €9,163 from the 401(k) plan.
The tax office, on the other hand, assumes that, at least for payments made into a "401(k) pension plan" from January 1, 2008, the exemption in §3 No. 63 of the EStG is to be applied accordingly, so that the payments based on this are to be taxed in arrears. After the FA had still included positive income of €48,702 in the income tax assessment for the year in dispute, it reduced the income to €26,755 (in each case before deduction of the lump sum for income-related expenses) in the appeal ruling. There is no dispute about the calculation method.
Court Decides: US Pension Plan is Taxed on Settled Payment
In the case in dispute, this income is to be taxed - as the lower court rightly decided - in accordance with cl. 2 of the provision in the amount of the difference between contributions and payment received.
The Tax Court correctly decided that only the difference between the payment from the "401(k) pension plan" and the sum of the contributions paid on this in the USA is subject to taxation in accordance with §22 no. 5 EStG. There is no legal basis for the differing tax office’s view. This provision of the income tax act implements the principle of deferred taxation (retirement) income. Corresponding to the tax exemption or subsidy of contributions and payments as well as the exemption of earnings and increases in value in the savings phase, the benefits from the respective contract or pension system are only taxed --and in full-- in the payout phase. According to the understanding of the legislator, deferred taxation is based on the ability-to-pay principle.
The contrary view of the FA is not consistent with either the wording or the literal meaning of the provision. In the event, your tax assessment is conflict with this judgment: file an appeal!