Federal Tax Court finally clarifies how payouts from US pension plans are taxed in Germany

Payments from US pension plans, including the 401(k) plan type, are not treated as a capital gain. Instead, they are recognized as pension payments and are subject to the personal tax rate. This status is a result of earlier rulings by Germany’s Federal Tax Court. However, it remained unclear whether the US pension plans would fall under Sec. 22 no. 5 sentence 2 b or c of the German Income Tax Act (Einkommensteuergesetz – “EStG”). This question of classification is important as it largely determines the scope and magnitude of taxation in such cases. In its judgment of June 25, 2025, (published on December 18, 2025), the Federal Tax Court conclusively cleared up any uncertainty.

Previous legal situation

Essentially, German tax law follows the principle of downstream taxation in the case of payments from (foreign) retirement income and external company pension schemes (i.e. tax is levied when the pension is paid). In the pension accumulation phase, contributions are tax advantaged, whereas later payments are subject to taxation pursuant to Sec. 22 no. 5 sentence 1 EStG.  In the case of many US retirement plans, this has been safeguarded since the 2008 revision of the tax treaty between the USA and Germany under Article 18A, together with protocol provision no. 16(a).

Until the Annual Tax Act 2024’s amendment, payments from 401(k) plans could therefore be treated as tax-privileged under the conditions set by Sec. 22 no. 5 sentence 2 EStG. Depending on the circumstances of the individual cases, either only half of the payments from the pension plan were subject to taxation or, in the case of old contracts concluded before January 1, 2005, even full tax exemption of the income was possible. 

In practice, this meant that payments from tax-advantaged 401(k) plans in the USA were sometimes treated more favorably for tax purposes in Germany than comparable payments from domestic company pension schemes. The legislature later judged this to be an objectively unjustified advantage and responded accordingly. It codified the full taxation of foreign pension benefits with effect from the 2025 assessment period where contributions during the accumulation phase were given preferential treatment or tax-exempt under foreign law in a manner comparable to German tax treatment.

Clarification due to the Federal Tax Court ruling published on December 18, 2025

In its ruling of June 25, 2025, the Federal Tax Court also clarified that payments from 401(k) plans fall exclusively under Sec. 22 no. 5 sentence 2(b) EStG. The Tenth Senate has thus expressly abandoned its previous case law, in which classification under the catch-all provision of Sec. 22 no. 5 sentence 2(c) EStG was at least left open. Payments from 401(k) plans can therefore not fall under letter (c) due to their structural comparability with pension funds, pension plans and direct insurance policies.

The date on which the underlying contract was concluded is therefore decisive for the specific tax treatment. This is because the reference in Sec. 22 no. 5 sentence 2 (b) EStG stipulates that the version of Sec. 20(1) no. 6 EStG applicable at the time the contract was concluded must be applied. If the 401(k) plan was concluded before January 1, 2005, the income is generally fully tax-exempt.  However, this presupposes that the 401(k) plan can be qualified as insurance within the meaning of Sec. 10(1) no. 2(b) EStG in the version applicable at the time and that there is also a minimum term of twelve years between the conclusion of the contract and the earliest possible payout date.

If the contract was concluded after December 31, 2004, and payment was made before January 1, 2025, the difference between the insurance benefit and the premiums paid in is generally subject to tax under the legal situation applicable since 2005. If the payment is made after reaching the age of 60 and after a minimum term of twelve years, only half of this difference is taxable. This half taxation is therefore subject to strict time requirements, the fulfilment of which must be carefully examined in each individual case.

The legal situation has changed fundamentally for payments from January 1, 2025. The Annual Tax Act 2024 included foreign tax-privileged contributions in the negative catalogue of Sec. 22 no. 5 EStG. Payments from 401(k) plans are therefore generally subject to full taxation from 2025 in accordance with Sec. 22 no. 5 sentence 1 EStG if the contributions were tax-exempt abroad during the savings phase. In these cases, partial taxation or tax exemption of the income is excluded.

Practical significance

The Federal Tax Court ruling has considerable practical significance for payouts from US pension plans up to and including December 31, 2024. It creates legal certainty insofar as the tax authorities can no longer fall back on the more disadvantageous catch-all provision of Sec. 22 no. 5 sentence 2(c) EStG. At the same time, however, the Federal Tax Court expressly emphasises that the burden of presentation and proof for all tax-reducing facts lies with the taxpayer. If, for example, the date on which the contract was concluded, the minimum term or the contribution history cannot be sufficiently proven, this is at the taxpayer’s expense in accordance with Sec. 90 (2) of the German General Tax Code (AO).

Conclusion

The Federal Tax Court’s ruling provides long-awaited clarity on the taxation of payments from US 401(k) plans until the system change by the Annual Tax Act 2024. While there remains scope for tax relief in respect of payments made before January 1, 2025, any such relief requires careful analysis and comprehensive documentation. At the same time, the Federal Tax Court makes clear, through its renvoi to the tax court of first instance, that the applicable tax treatment in an individual case depends on several factors. In particular, it depends on whether the 401(k) plan qualifies, under a comparative-law analysis, as an insurance contract within the meaning of Sec. 10(1) no. 2(b) EStG (old version). It also depends on whether a minimum term of twelve years existed until the earliest possible payout date. This assessment may necessitate further factual findings, in particular with respect to the relevant US law.

As regards 401(k) plans that have not yet entered the payment phase, however, the tax focus has shifted significantly. As payouts from 2025 onwards are regularly subject to full taxation in Germany where the underlying contributions were tax-privileged abroad, the timing of payouts and tax residency is becoming considerably more important. Particularly in the case of US citizens abroad and returning residents, it is therefore important to assess at an early stage whether a payout should be structured before the establishment of unlimited tax liability in Germany or only after a subsequent departure.