Downstream taxation

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The principle of Downstream taxation means that retirement income (pensions and pensions ) of income tax are subject in full. In return, the contributions or expenses for the acquisition of the pension entitlement are exempt from income tax through tax exemptions or special expenses deduction.

Until 2004, pensions from statutory pension insurance, professional pension schemes and old-age insurance for farmers were only taxed with the so-called earnings share , while pensions for civil servants and pensions from company pension schemes were taxed almost at the full amount of their income. Half of the total pension contributions are made up of an employee's share and an employer's share . As part of the gross salary, the employee contribution was subject to income tax, so that taxing the later pension would have led to inadmissible double taxation of the employee's share. In response to a complaint from pensioners, the Federal Constitutional Court nevertheless ruled that the full taxation of pensions and the non-taxation of pensions were contrary to the constitution within the meaning of the principle of equal treatment (Article 3).

The Retirement Income Act has therefore gradually switched to downstream taxation since 2005 until 2040. The transition to downstream taxation and tax exemption for pension expenses is taking place step by step, as the tax losses that would occur if the state were to be introduced immediately would be unsustainable and double taxation would result.

There are three reasons for the transition to downstream taxation:

  • Binding effect and legislative mandate for action from the jurisprudence of the Constitutional Court, which the Retirement Income Act led
  • State support for private, funded old-age provision
  • Tax advantages for the citizen, as a lower tax rate is applied at retirement age than during working life due to the generally lower income . Although this statement is not generally applicable, it regularly applies. However, this argument is partially rejected as a government promotional message.

See also: Pension Taxation