BFH decision opposes the view of the tax authorities:
The tax subsidisation of contributions to a “401(k) pension plan” in the accumulation phase under US tax law should not lead to full downstream taxation of later payouts.
The tax authorities in all countries are of the opinion that payments from US pension plans, which are mentioned in the protocol of 1 June 2006 amending the double taxation agreement between Germany and the USA of 29 August 1989 (No. 16 to Art. 18A), are to be taxed as other benefits in accordance with § 22 No. 5 EStG. Insofar as the benefits are based on contributions which were tax-exempt in the savings phase in the USA since 01.01.2008, the contributions are to be considered as subsidised under § 3 no. 63 EStG. The resulting benefits are to be taxed in full in accordance with § 22 no. 5 sentence 1 EStG.
The BFH has now contradicted this decision in connection with a so-called US “401(k) pension plan” and rejected the application of Section 22 No. 5 Sentence 1 EStG in the case of subsidised contributions based on US law in its ruling of 28 October 2020.
The plaintiff worked on behalf of his German employer in the USA from mid-2005 to mid-2011 as part of a secondment. During the posting period, the plaintiff had given up his domestic residence and had his only residence in the US. The US employer allowed the plaintiff to participate in a “401(k) pension plan” in which both the employer and the employee had to make contributions. The contributions remained tax-free during the accumulation phase in the USA according to US regulations.
After his return from the USA and (re-)establishment of his German residence, the plaintiff received a payment from his 401(k) pension plan. In his German income tax return, he declared the difference between the payout and the contributions made to the plan – and thus only the increase in value – as taxable (§ 22 no. 5 sentence 2 EStG). The contributions made in the savings phase had not been taxed according to the – German – provisions mentioned in the law (e.g. by tax exemption according to § 3 no. 63 EStG or special expenses deduction according to the provisions of the EStG), so that the conditions for taxing the payout in full according to § 22 no. 5 p. 1 EStG (full deferred taxation) did not exist.
However, the tax office – insofar as the payments were made after 1 January 2008 – deviated from this by subjecting not only the increase in value but the entire payment to taxation. It is true that the tax incentive for contributions according to US regulations is not covered by the wording of § 22 no. 5 sentence 1 EStG. However, if the payout in the present case were only taxed in the amount of the increase in value, this would lead to a double non-taxation in such a way that the contributions were already not subject to taxation in the savings phase (in the USA) and would also not be subject to taxation in the later payout (in Germany); in the opinion of the tax authorities, this could not be intended by the legislator. In order to close this loophole, the contributions to the “401(k) pension plan” were therefore to be interpreted as “fictitiously” favoured within the meaning of § 3 no. 63 EStG, with the consequence that the entire payment was to be taxed in full on a deferred basis. Since the plaintiff’s objection to this was unsuccessful, he filed an action.
In its ruling of 9 August 2018, the Cologne Regional Tax Court of first instance upheld the action and decided that the tax office had wrongly subjected the full amount of the payment made in 2011 to taxation. Rather, only the difference between the benefit and the sum of the contributions paid on it may be subject to domestic taxation (section 22 no. 5 sentence 2 EStG). The tax court saw no legal basis in national law or in treaty law for the contrary view of the tax authorities. The interpretation of the law in the sense of the tax authorities to close a “legal loophole” would rather lead to an inadmissible further development of the law. The tax authorities have appealed the ruling to the Federal Fiscal Court.
Decision of the BFH
The BFH rejected the tax authorities’ appeal as unfounded. It confirmed that benefits from a US “401(k) pension plan” constitute other income pursuant to section 22 no. 5 sentence 1 EStG. However, according to § 22 no. 5 sentence 2 EStG, the income was only taxable in the amount of the difference between the capital payment and the contributions, provided that the taxpayer was not subject to domestic taxation during the savings phase, so that the tax exemptions or subsidies for contributions listed exhaustively in this provision could not be granted. The BFH clarifies that the provisions in § 22 no. 5 sentences 1 and 2 EStG do not allow, either according to their wording or by way of analogy, to take the exemption of contributions to the “401(k) pension plan” actually granted under US tax law during the savings phase as a reason to tax the benefits therefrom in Germany (in full) on a deferred basis. The regulation of a taxation deviating from this is reserved to the domestic legislator alone.
IAC Practice – Note
In the practice of secondment, payouts from US pension plans during German tax liability are not uncommon. Not only the so-called “401(k) pension plans”, which are widespread in the USA, are affected by the problem of deferred taxation, but in principle also payments from other common US pension plans such as so-called “Individual Retirement Accounts” (“IRA”).
Such issues should be carefully examined and discussed with your international tax advisor. The treatment continues to be exciting and the final word and verdict has certainly not yet been determined or found.
Cologne Fiscal Court, ruling of 09.08.2018, 11 K 2738/14
BFH, judgement of 28.10.2020, X R 29/18