Cross-border pension taxation affects more and more people – whether due to former employment abroad or a change of residence during retirement. Anyone receiving a pension from multiple countries must know where and how this income is taxed. We explain the most important principles.
1. Who is liable for tax in Germany?
German tax law distinguishes between three forms of income tax liability:
Unlimited tax liability (unbeschränkte Steuerpflicht) applies to all persons with a residence (§ 8 AO (Fiscal Code)) or habitual abode (§ 9 AO) in Germany. They must pay tax on their worldwide income – the so-called world income principle. Foreign pensions must therefore generally be declared.
Extended unlimited tax liability (Erweiterte unbeschränkte Steuerpflicht) (§ 1 Abs. 2 EStG (Income Tax Act)) concerns Germans in foreign service who are not subject to full tax liability there.
Limited tax liability (beschränkte Steuerpflicht) applies to persons without a residence in Germany who receive domestic income (§ 49 EStG) – e.g. a German pension while residing abroad.
2. What do Double Taxation Agreements (DBAs) regulate?
To prevent the same pension from being fully taxed in two countries, Germany has concluded DBAs with over 90 states. They regulate which country has the right to tax – and are thus the heart of cross-border pension taxation.
Two methods are used:
Exemption method (Freistellungsmethode): The pension is only taxed in the source state and exempted in the state of residence – however, it is often included for the progression clause (Progressionsvorbehalt).
Credit method (Anrechnungsmethode): Both states may tax, but the foreign tax is credited against the German tax.
3. Important country examples
Germany – Austria: Statutory pensions are taxed in the state of residence. Someone who lives in Germany and receives an Austrian pension pays tax on it in Germany.
Germany – Switzerland: Pensions from the AHV are taxed in the state of residence. For occupational pensions, the treatment depends on whether the former employer was public or private.
Germany – USA: Social Security pensions are taxed only in the state of residence according to the DBA. Private pensions may be regulated differently.
Germany – Great Britain: The DBA regulations continue to apply even after Brexit. The British State Pension is taxed in the state of residence.
4. Progression Clause: Even tax-free pensions increase the tax rate
Tax-free foreign pensions are mathematically added to total German income to determine the tax rate – this higher rate is then applied to the income that is actually taxable.
Example: €20,000 German pension + €8,000 tax-free Austrian pension = tax rate based on €28,000, but only the €20,000 is taxed.
5. Annex R-AUS (Anlage R-AUS): How to enter foreign pensions
Foreign pensions belong in the Anlage R-AUS of the German tax return. The country of origin, the amount, and any foreign tax already paid must be entered. Certificates from the foreign pension office should be kept.
Conclusion
Cross-border pension taxation is one of the most complex fields in tax law. Lexo.Tax helps you to correctly declare all pensions, apply DBAs properly, and ensure you don't miss out on any tax advantages.