Six point Summary of key issues Canadian Advisors need to know Re: Taxation of German Social Security Pension
The German Tax Office FINANZAMT NEUBRANDENBURG (FAN) has the special authority for the assessment of German Pension recipients living abroad and for the registration of foreign tax consultants. It consists of a Tax Return Processing Centre a Tax Collection Centre and a Tax Enforcement Centre.
1 – Tax Return filing to Germany is optional – Germany automatically sends out several years of tax Assessments at one time to the pensioner. NOTE: Many German pensioners still only have been assessed to the 2011 – 2013 tax years.
To bring pensioner up to date – actual missing years’ tax returns should be filed to FAN now. FAN will then send out those missing years Assessments within a couple of months.
2 – Once German Tax Assessments have been received the pensioner has about 2 months to pay the taxes or file an objection asking to qualify for the lower tax rate.
3 – If requesting to be assessed at the lower tax rate – a 1A – Unlimited Tax Liability Tax Return needs to be filed with the proper supporting Canadian documentation attached and sent to the FAN.
Canada applies a withholding tax on non-resident Pension payments. Germany has refused to do so and therefore pays out the full pension amount to the pensioner.
4 – If Germany is deducting taxes from the Pensioners German Pension or installment tax payments are having to be paid the PENSIONER PROBABLY HAS AN OUTSTANDING GERMAN TAX LIABILITY at the FAN Collections or Garnishment Office.
5 – Upon death of the pensioner a Death Certificate needs to be sent to the FA Neubrandenburg. It will then send out a short Heirs questionnaire and request filing of any outstanding tax returns. FAN can only verify if all current tax returns have been filed or if any recent taxes are still outstanding.
6 – Payment of taxes to Canada on the German Pension does NOT exempt the pensioner from having to pay taxes to Germany on his German pension. Nonpayment of outstanding taxes is classified as TAX EVASION and NOT TAX AVOIDANCE!
Because of the increasing ages and death of pensioners it is very important for Pensioners, Executors, Heirs, P.O.A and Representatives to make sure NOT ONLY with the Finanzamt Neubrandenburg but ALSO they need to verify with the FAN Collections and Garnishment Dept. that there are no German tax liabilities still outstanding from the deceased pensioner.
FAN is backlogged but they also know that there is no statute of limitation on the taxes owing. They will invoke Article 27 Assistance in Collection from Canada.
Canada also has Section 160 which states – Heirs can be held responsible for tax debt of the deceased.
All in a day’s work:
Many German Pension Recipients are paying unnecessary high taxes to Germany by providing improper documentation. I would like to explain that in more detail with an example from my office. Here is what happened:
A German Pension Recipient, I had analyzed as qualifying for the unlimited tax liability, was extremely upset when he received his notifications (“Bescheids”). It showed him owing taxes of 5,900 Euros on his 40,000 Euro pension for 3 years. I asked him what he had done and it turned out that he had submitted his CRA Notice of Assessment. I quickly filed an objection, provided the proper documentation and he received the new notifications (“Bescheids”) from the German Tax Office showing taxes owing of only 320 Euros on his 40,000 Euro pension for the 3 years.
Here is how Germany determines your tax rate:
Limited tax liability (highest flat tax rate of about 15% on the taxable German pension)
Unlimited tax liability (lowest tax rate 0% to about 5% on the taxable German pension)
As a latest development the German Tax Office is now sending German pension recipients living in Canada a letter stating that they will be sending them Tax Assessments in about 2 months time. At the same time they are making the pensioner aware of the option to be taxed at the lowest tax rate. The German Tax Office has also included an English version which in part states:
Application for treatment to unlimited tax liability
For your application to be granted, you must submit confirmation using the tax notices (Income Tax Return Information Regular or Tax Return Summary).
Most pensioners are sending the Notice of Assessment Summary page from CRA to Germany showing Line 150. This is insufficient information for the German Tax Office to calculate if they qualify. In turn the German Tax Office informs the pensioner that due to insufficient information they are assessing them at the highest tax rate. If the pensioner disagrees with the assessment they still have 2 months from the date of the notification (“Bescheid”) to file an objection. Thereafter there is no recourse and they have to pay the assessed tax amount even if they are assessed in the incorrect tax category. If the German Tax Office is not able to evaluate line 101 to 146 they will be entitled to charge the taxpayer the highest tax rate allowable on their German pension. Many pensioners, tax preparers and accountants feel that the German Tax Office is unreasonable. But it is no different than close to home. If you ask CRA how much you have to pay in taxes when your income as per Line 150 is $25,000, they will definitely not be able to tell you the true tax amount payable. They will also need to see line 101 to 146 to analyze what type of income it is in order to be able to assess the proper tax rate on the $25,000.
The onus is on the taxpayer to provide the proper documentation so as to be assessed at the correct tax rate.
Welcome to Global Taxation!
The German Tax Office (Finanzamt Neubrandenburg) has started sending out Notices (Vollstreckungsankündigung) to those Pension Recipients living in Canada who never responded or paid their taxes as requested (Bescheid) to Germany starting as of 2005.
These Notices show all the amounts and the years delinquent along with a monthly .5% late fee applied. The pensioner is requested to pay all amounts within a couple of months or to apply arranging for a payment schedule. (Stundung)
To guarantee collection of taxes the German Tax Office has been given the power to invoke a withholding tax (Anordnung des Steuerabzugs) to be taken from the pension of confirmed non compliant pensioners. This is only possible for future years and the pensioner is still responsible for paying his tax obligations for all prior years.
For those pensioners who fail to respond or pay their tax obligations their file will be forwarded on to the Garnishment Office (Pfändungs-und Einziehungsverfügung).
This Department has the possibility to seize the pensioner’s German Assets and/or invoke Article 27 of the Tax Treaty and ask Canada for Assistance in Collection.