Germany - Court rules on taxation of income from German statutory pension after move to Italy

A long working life is over and so it happens that some pensioners decide to move their residence abroad. But which country has the right of taxation for the pension? The German Federal Fiscal Court recently decided this issue -- again -- in the case of a pensioner with German citizenship who moved his residence to Italy.

According to the relevant provision in the Germany-Italy income tax treaty, pensions paid under the social security legislation of a contracting state by that state will be taxable in that state only if the recipient is a national of that state without being a national of the other contracting state.

In a prior decision from 2011, Germany’s Federal Fiscal Court interpreted this provision -- and the word “by” – to mean that Germany, as the source state, would not have a right of taxation because the pension derives from contributions of the employee and the employer. This led to the risk of double non-taxation, because Italy also denied an Italian right of taxation.

In 2022, the Federal Fiscal Court changed its position regarding the interpretation of the treaty provision so that a state entity does not need to be the economic bearer of the pension payment. The underlying cash state principle in the income tax treaty should be understood in a broader sense. This results in Germany having the right of taxation.

The change in case law has implications for German pensioners living in Italy. They are subject to a limited tax liability in Germany and thus have tax declaration obligations and tax payments in Germany. Under certain conditions, the tax payments may be avoided by applying for treatment as a taxpayer with unlimited tax liability; however, that would involve considerable compliance efforts on the part of the German pensioner abroad.

Christiane Anger
BDO in Germany

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