Pension Recipients and Heirs Beware: German Pension Tax Collection Steps Up

Evelyn Jacks with notes from Siegfried Merten, MFA™

Do you have clients who are recipients of German social security pensions?  If so, many of them may be very elderly.  Unfortunately, they and their heirs may be experiencing a new stressor:   the tax department in Germany, Finanzamt Neubrandenburg, is clamping down on taxes they think are owing by delinquent German pension recipients living in Canada and charging interest and penalties. The issue is:  can they?

The problem all stems back to tax year 2005.  The Canadian pensioners who received their previously exempt full pension from Germany were notified by the Deutsche Rentenversicherung (German pension insurance) that starting in 2005 a portion of the pension was taxable and they are required to get in touch with the Finanzamt Neubrandenburg. 

Canada has a tax treaty with Germany to prevent double taxation.  Under that agreement, the social security benefits may be taxed in the country of residence, to the extent they would have been included in income in the source country.  Germany technically should have no recourse in taxing Canadian residents on their German pension income.  But, they do, based on a 2018 court case, highlighted on CRA’s website:

The Federal Fiscal Court (the Bundesfinanzhof) overturned a lower court ruling by determining that Article 18 of the Canada-Germany Tax Agreement allows Germany to tax German social security pensions received by residents of Canada. In Canada, foreign tax credits can be claimed by Canadian residents for German taxes paid on these pensions. Therefore, the decision of the Federal Fiscal Court in Germany does not affect the Canada Revenue Agency’s administration of the Agreement.

The legal wrangling to collect taxes from non-resident recipients did not stop there.  Back in  Germany, the German Pension Office cannot by law deduct taxes from that German Old Age Security. But, in accordance with section 50a (7) of the German Income Tax Act,  the Finanzamt Neubrandenburg can  force the Pension Office to withhold the annual tax amount owing but only if the taxpayer was non-compliant in paying their prior years’ taxes.  The withholding tax can only apply to the current & future years; not prior years.

Meanwhile, the Canadian resident taxpayer receiving this German pension is caught in this interdepartmental and international complexity and red tape. Finanzamt Neubrandenburg is sending out Enforcement Letters in English and in French warning that there will be further consequences if Canadian resident recipients of the pension don’t pay these now overdue back taxes.  And the enforcement activities are stepping up; hence the new stressor for these families.

Sigfried Merten, MFA, who brought this matter to our attention, notes:  “At my last meeting with the Managers of the Canada Division at the Finanzamt  Neubrandenburg the Director of the Finanzamt made the following comment:

‘If the outstanding taxes are not being paid and cannot be collected in Germany they will invoke Article 27 of the Canada Germany Tax Treaty Assistance in Collection. Canada will be requested to collect the outstanding taxes and collection expenses on their behalf since non-payment of the taxes is a direct form  of tax evasion.’”

What advisors need to know:  Under Section 49 Abs.1 Nr.7 Einkommenssteuergesetz (the German Income Tax Act), there is a limited tax liability, which CRA and the courts concur with, at least for now.  No doubt there may be more challenges down the line to challenge the prominence of the Germany-Canada Tax Treaty over the administrative activities.   

But for now, according to the CRA, recipients of this Old Age Security from Germany who reside in Canada must submit paperwork to Germany, as set out by the German tax authorities, to mitigate their tax positions over there.  Filing a tax return is no longer required, under an available simplified method, however, do take note of the consequences of non-compliance, as explained on the CRA site:

“If a tax return is not filed, Germany's Neubrandenburg tax office will assess non-resident pensioners based on the pension they receive and will send the pensioners a notice of assessment together with a reply slip. The pensioners can use the reply slip to object to the assessment or to apply for an amendment of the notice of assessment. . .if residents of Canada choose to send a reply slip before receiving the German notice of assessment, the Neubrandenburg tax office will assess their tax owing based on the information they give in their reply slip.”

There is one more matter to discuss with clients:  the issue will not go away with the death of the recipient of the German pension. 

Siegfried writes “In Germany a Certificate of Clearance is not required when someone dies, since the heirs are liable for the deceased final estate taxes. On my last visit at Neubrandenburg we agreed on a type of “Clearance Certificate” in 3 languages. I have had success in getting the late fees & interest charges reduced or removed on a case-by-case decision after the outstanding tax liabilities had been paid. This is the last chance for delinquent taxpayers to comply before court.”

Contact Sigfried Merten, MFA at Merten Financial, if you require more assistance about this matter with your clients.