Adjustment of the tax-exempt portion of pensions following the introduction of the “mothers’ pension” – Decision by the Federal Fiscal Court (BFH)

An important ruling by the Federal Fiscal Court (BFH) concerns the adjustment of the tax-exempt portion of pensions following the introduction of the "mothers' pension." The ruling of December 14, 2022 (published on May 25, 2023) dealt with the increase in a current statutory old-age pension due to a supplement for child-rearing periods. The BFH clarified that this increase leads to an adjustment of the previous tax-exempt portion of the pension and that interim pension adjustments are not taken into account.

Facts

The case before the BFH involved a male plaintiff and a female plaintiff, both born in 1944 and 1945, respectively, who received life annuities from the statutory pension insurance scheme and a pension fund. Starting July 1, 2014, the plaintiff received a supplement (“mother’s pension”) of one pension point due to two eligible children. The plaintiffs argued that the opening clause should apply not only to benefits from the pension fund but also to pension income from the statutory pension insurance scheme. They also requested a different calculation of the tax-exempt portion of the pension that does not take the scope of the opening clause into account. The Finance Court dismissed the complaint in its entirety.

Decision of the Federal Fiscal Court

The Federal Fiscal Court (BFH) ruled that the opening clause does not apply to the taxation of the statutory pension if a taxpayer receives pensions from both a professional pension fund and the statutory pension insurance scheme. The tax-exempt portion of the pension must be calculated in accordance with Section 22(1), Sentence 3, Letter a, Subletter aa, Sentence 4 of the Income Tax Act (EStG), without taking into account the portion subject to taxation of the earnings component.

The Federal Fiscal Court (BFH) also determined that the introduction of the “mothers’ pension” in 2014 did not create a new pension, but rather resulted in an extraordinary modification of the original pension. The adjustment of the tax-exempt portion of the pension is based on the pension commencement date in 2011, whereby interim increases in pension points must be taken into account. In the present case, this resulted in an increase in the plaintiff’s tax-exempt portion of the pension by €131.23 instead of €109.86.

Conclusion

The Federal Fiscal Court’s ruling on the adjustment of the tax-exempt portion of the pension following the introduction of the “mothers’ pension” has far-reaching implications. The “mothers’ pension” resulted in a supplement for each child and affected the calculation of the tax-exempt portion of the pension. The BFH ruled that interim pension adjustments are not taken into account and that the opening clause does not apply to the taxation of the statutory pension when pensions are received from a professional pension scheme. The BFH’s decision makes it clear that the calculation of the tax-free portion of the pension and the application of the opening clause must be carefully examined to avoid double benefits.

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