Have you moved to Switzerland for professional or private reasons and are planning to relocate to Germany at retirement age? The following article will give you an overview of the tax consequences.
Unlimited tax liablity in Germany
In principle, the relocation to Germany leads to unlimited tax liability in Germany. Generally, the worldwide income is subject to German income taxation, including income from the Swiss pension system. Moreover, the taxation of income from the Swiss pension system is in general not restricted by the DTA between Germany/Switzerland.
Swiss withholding tax
A lump-sum settlement from the Swiss private social security system is subject to withholding tax in Switzerland. However, according to the DTA between Germany/Switzerland, only Germany is entitled to tax the payments from the Swiss private social security system. Therefore, the taxes withheld in Switzerland can be refunded within three years after its maturity. In general, the same applies to payments as a life annuity. However, if the taxpayer can provide evidence that the German tax authorities are informed about the life annuity payments, no Swiss withholding tax will be withheld. Such evidence could be provided through a residence confirmation.
1st pillar: state pension (AHV)
The AHV is comparable to the German statutory social security pension system. Therefore, payments from the AHV are taxed in the same way in Germany as income from the statutory pension insurance system. This means that payments from the AHV are taxed with a fixed portion, depending on the retirement age. For example, if the first payment is made in 2032, 92% of the payment are taxed. The remaining 8% can be withdrawn tax-free. If the payments start in 2020, only 80% are subject to taxation, and 20% are exempt from income tax. The increase of the taxable portion reflects the fact that since 2005, contributions to the statutory pension system can be deducted from the taxable income as so-called special expenses.
2nd pillar: occupational pension plan (BVG) – difference between mandatory insurance and extra-mandatory pension provision
Within 2nd pillar, i.e., occupational pensions, a distinction must be made between the statutory minimum insurance (pillar 2a: mandatory insurance) and the more extensive pension insurance based on the respective regulations (pillar 2b: extra-mandatory pension provision). As a rule, the employer pays the employer's and the employee's contributions to a pension fund in one amount for both the mandatory and the extra-mandatory pension provision. However, the pension funds keep individual retirement accounts for their insured persons. Therefore, it is possible to break down the contributions using a "shadow calculation".
Pillar 2a: mandatory insurance
Payments from pillar 2a regularly qualify as income from statutory pension insurance for the purposes of German taxation. If the pension payment is made in the form of a life annuity, this is to be assessed with the relevant tax portion (see 1st pillar).
If pillar 2a benefits are paid in the form of a lump-sum settlement, this generally applies accordingly. However, by application, if contributions to pillar 2a above the relevant income threshold were paid for at least ten years prior to 2005, the benefits attributable to these contributions may also be taxed in the amount of the lump-sum share of earnings (so-called opening clause, see taxation of extra mandatory pension provision). In addition, in the case of a lump-sum settlement, there is the possibility of a tax concession (so-called fifth rule) if the corresponding (additional) conditions are fulfilled.
Pillar 2b: extra-mandatory pension provision
Payment as a life annuity
Insofar as benefits from the extra-mandatory pension provision are provided as life annuities, (only) so-called income share is subject to taxation. The income share represents the interest portion of the amount paid out in a lump-sum and depends on the age of the beneficiary at the start of the annuity. For example, if the taxpayer is 60 years old at when the payments start, the share of the taxable income is 22%. The remaining 78% can be withdrawn tax-free.
Payment as a lump-sum settlement
Insofar as the extra-mandatory pension provision is paid in the form of a lump-sum settlement, the income is considered as capital income in Germany. Tax is levied only on the difference between lump-sum settlement and the total contributions made (tax base). This tax base is subject to a separate tax rate of 25% (so-called Abgeltungsteuer).
If the lump-sum settlement is made after the age of 60 and 12 years have elapsed since the conclusion of the contract between the tax payer and the pension, the assessment basis is reduced by half. For contracts concluded from 2012 onwards, the age of 62 is decisive in this respect. However, the income will then be taxed at the ordinary rate.
3rd pillar: private pension
3rd pillar benefits are generally treated as a lump-sum settlement from the extra-mandatory pension provision. However, the respective tax consequences must be examined on a case-by-case basis.
Contributions into the Swiss social security system reduce, as "general deductions", the taxable income in Switzerland. In Germany, payments from the Swiss social security system may be tax-advantaged (considerably). The early establishment of a (voluntary) pension plan in Switzerland can, therefore, lead to considerable tax savings, in particular, if it is planned to return to Germany after completing of the career.