Income within Article 17(4) UK/Germany DTA

[GaryC]

Wondering if PandaMunich can clarify whether a war pension, or similar, that is not taxable in Germany by reason of Article 17(4), which awards taxing rights to the UK, even though the UK then exempts it from tax, would feed into Progressionsvorbehalt?

[PandaMunich]

No, don't worry.
Because these kinds of pensions are also tax-free if they were German, see § 3 Nr. 6 EStG: https://www.gesetze-im-internet.de/estg/__3.html

[GaryC]

I thought that was the case but wasn't 100% sure, nor was I aware of the statute...

[GaryC]

Just a further thought. Does the War Pension feature at all on the tax return, either a German War Pension, or a British one?

[GaryC]

OK, so this issue has taken a somewhat complicated turn.

The amount involved is an "Early Departure Payment" under the Armed Forces Pension Scheme - not sure if it is the 2005 or 2015 scheme but I don't think that is overly relevant.

From what little I have read, the EDP is not a pension but is a payment of a monthly income and a lump sum for those who leave the military at age 40 or older but before normal pension age. It ends when the pension kicks in at pension age. The monthly income is taxable but the lump sum is exempt by virtue of S640A ITEPA 2003. It is also possible to receive an EDP if you leave the service on medical grounds where the condition is not directly linked to that service, i.e. not suffered in the line of duty, as it were.

The question is, does this fall under Article 18(1) or (2)? It seems to me that 18(2) is the more likely home as it would appear to be a "pension or other similar remuneration" and is not received in relation to current military service - it is received because you are no longer serving.

Assuming the recipient is not a German citizen, would such income fall within Section 3, para 6 EStG? It doesn't immediately seem to fall within that exemption...

[PandaMunich]

The question is, does this fall under Article 18(1) or (2)? It seems to me that 18(2) is the more likely home as it would appear to be a "pension or other similar remuneration" and is not received in relation to current military service - it is received because you are no longer serving.

I agree.

Assuming the recipient is not a German citizen, would such income fall within Section 3, para 6 EStG? It doesn't immediately seem to fall within that exemption...

No, because everybody gets that "Early Departure Payment", while a pension that is tax-free because of § 3 Nr. 6 EStG has to paid out because that specific person had suffered "damage" during their service, i.e. it is meant to compensate that damage.

The "Early Departure Payment" just depends on age and the "years of service": https://forcespensionsociety.org/2021/1 ... omparison/

• EDP is not paid to everyone who leaves service, only those who reach the qualification criteria. The point at which EDP is payable on AFPS 05 is the 18/40 point; for AFPS 15 it is the 20/40 point. What this means for each scheme is that you must have reached the age of 40 and, in the case of AFPS 05, have 18 years of service or for AFPS 15, 20 years of service. Both conditions (age and years of service) are required to qualify for the EDP point relevant to the scheme.

[GaryC]

Great, thanks. So, we think it falls under Article 18(2) but as it is not a "war pension" (or one of the other things in that section), it is, in essence, just early "retirement" either on age or health grounds, so would follow the same treaty treatment as a government service pension, i.e. taxable only in the UK but feeding into progression...