The payout of a life insurance policy is fully tax-free if the maturity benefit is paid out in full and in one amount. If, on the other hand, the annuity form is chosen, the income portion must be taxed. According to § 20 Para. 1 No. 6 EStG (old version), interest from savings units included in contributions to insurance policies on survival or death is included in income from capital assets. This does not apply to interest from insurance policies within the meaning of § 10 para. 1 no. 2 letter b EStG old version. These are, for example, pension insurance policies with a capital option in return for regular premium payments if the capital option cannot be exercised before 12 years have elapsed since the contract was concluded. They also include endowment insurance policies against regular premium payments with a savings component if the contract was concluded for a period of at least 12 years, which are offset against premiums or paid out in the event of an insured event or if the contract is surrendered after 12 years have elapsed since the contract was concluded.
Pension form: Taxation with the income share: If no use is made of the capital option in the case of a pension insurance policy with a capital option, but instead the life insurance policy is paid out as a life annuity in the form of monthly payments, the tax authorities are of the opinion that the pension withdrawal as a whole is to be allocated to other income in accordance with Section 22 EStG and taxed at the income share (BMF letter dated 31.8.1979). This constellation was the subject of legal proceedings before the Baden-Württemberg tax court. The plaintiff was of the opinion that the income portion should not be recorded under § 22, but under § 20 EStG and should be taxed at the flat-rate withholding tax rate of 25%.
To date, the BFH has only had to deal with the allocation of pension payments from insurance contracts that do not qualify for preferential treatment under Section 10 (1) no. 2b EStG (old version). It ruled that the entire pension payments (guaranteed pension, constant surplus participation from the savings phase, additional surplus participation from the pension phase) should fall directly under Section 22 no. 1 sentence 3 letter a EStG (in the case of a single payment, taxation takes place via Section 20 para. 1 no. 6 sentence 1 EStG old version).
In the case of preferential contracts, the Baden-Württemberg tax court took the view (ruling of 17.10.2017, 5 K 1605/16) that the pension payments as a whole are to be classified as income from capital assets. This results in tax exemption in accordance with Section 20 para. 1 no. 6 sentence 2 EStG. Allocating the entire pension payments to other income leads to taxation of the interest portion from the savings phase and thus to unjustified unequal treatment, which is also not intended by the legislator, compared to contracts that also benefit from the capital option. The method of payment as a lump sum or as a monthly pension payment is merely a payment modality that does not affect the tax exemption. Such a different tax treatment of the interest portion from the savings phase is not provided for in the wording of the law. Furthermore, uniform taxation of the entire pension payments in accordance with Section 22 EStG also leads to unjustified equal treatment of the preferential contracts with the non-preferential contracts (both taxed at the income share), although the legislator did not intend such equality.
In its ruling of 1.7.2021 (VIII R 4/18), the BFH agreed with the opinion of the tax court and took the view that the pension payments as a whole are to be allocated to income from capital assets. The wording of Section 20 para. 1 no. 6 sentence 2 EStG 2004 does not provide for different tax treatment of the insurance benefit depending on whether or not the capital option is exercised. Rather, by referring to § 10 para. 1 no. 2 letter b EStG 2004, the provision makes it clear that the tax exemption depends solely on the fact that the insurance contract generally belongs to the types of contract benefiting from this provision. However, it must be taken into account that the entire insurance benefit was not subject to taxation if the capital option was exercised, as the interest earned in the savings phase was tax-exempt in accordance with Section 20 (1) no. 6 sentence 2 EStG 2004.
For reasons of equal treatment, the total payments received when exercising the pension option are therefore also not subject to taxation, provided that the total pension amounts paid out do not exceed the capital balance accumulated during the savings period, including surplus shares. The BFH ruled that the method of payment (lump sum or monthly pension payment) is merely a payment method that does not affect the tax exemption.
Note: This ruling was never published in the Federal Tax Gazette, which means that the ruling was not applied by the tax authorities.
Annual Tax Act 2024: In Art. 3 of the Annual Tax Act 2024 (BGBl. 2024 I No. 387 of 5.12.2024), a legal amendment to Section 52 para. 28 sentence 5 EStG stipulates that taxation must be based on the income share for pensions from pension insurance contracts with a lump-sum option that were concluded before 1.1.2005. The amended version of Section 52 (28) sentence 5 EStG is to be applied in all open cases.
Conclusion: The case law of the BFH is therefore obsolete. § Section 20 (1) no. 6 EStG in the version valid on December 31, 2004 is thus expressly only applicable to benefits from pension insurance policies with a lump-sum option if a lump-sum payment is chosen. Pension payments from pension insurance contracts are thus to be taxed uniformly at the income share.