by Johannes Fiala, lawyer
In its ruling of 6 March 2002, the Federal Constitutional Court decided that Section 19 of the Income Tax Act is incompatible with Article 3 of the German Basic Law with regard to the taxation of pension payments. The legislator is obliged to introduce a new provision by 1 January 2005 at the latest. Regarding the necessary tax law changes the judgement contains among other things the following references: Only the first inflow of income may be taxed and not the rearrangement or the consumption of already existing fortune. The legislature is not obliged to retroactively rectify the legal situation. A retroactive dismantling of the advantages in the taxation of pensioners is out of the question from the outset for constitutional reasons. A retroactive improvement in the position of retired civil servants is also ruled out as a constitutional solution. It will be the task of the legislature to coordinate the taxation of pension expenses for old-age provision and the taxation of old-age pensions in such a way that double taxation is avoided. The ruling of the Federal Constitutional Court will probably lead to a gradual increase in the deduction of special expenses for employee contributions to statutory pension insurance over the course of the next few years. This will relieve the burden on employees. At the same time, there will be a gradual increase in the taxation of pensions over the next few years. However, this will only affect taxpayers with relatively high pensions and pensioners who have other taxable income in addition to their pension. Since most of the younger employees will receive less pension at retirement age than they have paid in pension contributions, it is advisable to keep payments into the statutory pension insurance as low as possible. Only in exceptional cases is it worthwhile to pay voluntary contributions into the statutory pension insurance scheme, for example when it is a question of making up for missing insurance periods for drawing an old-age pension before the age of 65. Ruling of the BVerfG of 6.3.02 (2 BvL 17/99) in DStRE 2002 p.349.