When and how pension plans are taxed
Many businesses, subsidiaries of multinational and non-multinational groups, provide their executives with the possibility to participate in group insurance schemes.
These programs usually provide for the payment of premiums by both the employer and the employee and the withdrawal of an insurance amount at the end of the program, either lump sum or in the form of a periodically paid (e.g. monthly) pension.
In accordance with the current Income Tax Code, effective as of 1 January 2014, premiums paid by the employee or employer on behalf of the employee under group pension / insurance policies are excluded from the calculation of income from paid employment, therefore these amounts are not taxed as a salary for the employee at that time.
Instead, self-imposed taxation will arise at the end of the retirement plan when the worker receives the insurance from either the lump sum or the retirement pension. The tax is:
- 15% for each periodically paid benefit.
- 10% for a lump sum payment of up to 40,000 euros.
- 20% for a lump sum payment in excess of € 40,000.
The above rates are increased by 50% in the case of collection by the beneficiary of an early redemption amount (i.e. before the expiry of the contract). Any payment made to an employee who has a pension entitlement or is over 60 years of age and any payment made without the will of the worker, such as in the event of his dismissal or bankruptcy of the employer, shall not be regarded as an early redemption. On the other hand, the recovery of the insurance due to voluntary dismissal of the employee by the company (if the above conditions are not met) constitutes an early redemption.
The tax is withheld when the insurance is paid by the insurance company and no further income tax is payable by the beneficiaries. However, a special solidarity levy is payable when the tax is cleared. It is noted that the amounts paid by the insurance companies to the beneficiaries appear pre-filled in their income tax returns.
The above method of taxation was applied by a relevant legislative provision (L.41010 / 2013) and to the pension plans received during the period 23/1/2013 - 31/12/2013.
Finally, in the event of the beneficiary's death and the payment of the amount of the insurance to the heirs, the benefit in question is subject to inheritance tax.
Amounts received before 23/1/2013
The issue of taxation of insurance benefits was not clear in the past. However, the Legal Council of the State, in its previous opinions and in the recent LCS 266/2017 (adopted by the Tax Administration), found that the insurance paid to the beneficiaries under group pension plans before 23/1 /2013, is the income of employees from salaried services, subject to taxation in accordance with the previous Law 2238/1994 (Article 45), at the time when the right to receive it was acquired.
This, irrespective of whether the payment of the premiums for the employee during the program was made without the employer's obligation, that is to say, by his or her liberty.
The insurance is taxed in the amount corresponding to the premiums paid by the employer for which no payroll tax has been paid. In the case of the partial payment of the premium by the employee, the benefit-insurance in the proportion corresponding to the premium paid by the employee is not taxed as income from salaried services unless the premiums were deducted from its gross income and were not taxed, in which case it is taxed.
Given that the tax treatment of these insurance benefits was explicitly regulated from 2013 onwards, in several cases beneficiaries who have received such amounts before 2013 did not declare them for taxation. It is worth noting, of course, that the years until 2011 are, in principle, time-barred, except in the case of an extension of the limitation period (not submitting a tax return, informing the tax administration of supplementary information, etc.).
G. Samothrakis, J. Panou
Posted on Sunday newspaper KATHIMERINI on 11/02/2018