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Employee bonuses where there is no legal entitlement – A provision is nevertheless possible

A provision for liabilities of uncertain timing or amount presupposes, among other things, that payment is more likely than not. According to a ruling by the Münster tax court, a sufficient degree of probability that the liability will arise can also ensue from a standard practice that has been maintained for years, namely, paying out employee bonuses where there is no legal entitlement. Leave to appeal was not granted.

Agreement on bonus payments

In the case ruled on by the Münster tax court, of 16.11.2022 (case reference: 13 K 3467/19 F), a GmbH [a limited liability company] paid a bonus to its employees, although there were no written agreements in place about this. New employees, at the time of recruitment, were given, among other things, the following information: “For years where there is a good business performance and a favourable outlook the GmbH pays a bonus to its employees in the spring of the subsequent calendar year. This bonus is a voluntary payment to which there is no legal entitlement.” In actual fact, the GmbH had paid a bonus to its employees in previous years, in the relevant year of 2014 as well as in the subsequent years. In the relevant year, an amount of around €300,000 was added to the provision. However, the local tax office did not recognise the provision. The local tax office justified this by invoking the fact that the employees had no legal entitlement to a bonus payment. Furthermore, the voluntary bonus payments were based not only on the operating results of the preceding financial year, but also on the future earnings performance.

Recognition of the provisions was permitted

The GmbH subsequently argued that the payment of employee bonuses was also communicated externally - the binding rules for event-related gifts as well as for bonuses were explained on the company website. The reservation of discretion merely meant that in a loss-making year no bonus would be paid. The Münster tax court recognised the provision. This may be created not only when a liability definitely exists on the balance sheet date and solely the amount is indeterminable, but also when there is a sufficient degree of probability that the liability will, in principle, arise in the future, although its amount can also be indeterminable. In the reasons for its judgement, the tax court analysed, in particular, the criterion of the “probability that the liability will, in principle, arise in the future“, although it would already be sufficient that the liability is more likely than not (“51 %“).

Outcome: In the case in question, the result was that a sufficient degree of probability did exist that the liability in respect of the payment of employee bonuses would arise, in particular, based on the standard practice of A-GmbH, over many years, of paying employee bonuses to the staff without being legally obliged to do so. Indicators that could be externally identified that, in the relevant year, A-GmbH planned to back away from this standard practice were not evident. Furthermore, the economic cause for the liability that would arise in the future lay in the period prior to the balance sheet date because the legal and economic reference points for the liability lay in the past.

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