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Pension commitments – No provision where there are harmful reservations

The requirements for creating a provision within the meaning of Section 6a of the Income Tax Act (Einkommensteuergesetz, EStG) would generally not be met if the pension commitment included the reservation of the right to make changes. Recently, the Federal Fiscal Court (Bundesfinanzhof, BFH) had to rule on a case where an employer was able to change the ‘transformation table’ and the discount rate at his own discretion.

In order to be allowed to create a pension provision pursuant to Section 6a EStG a number of requirements have to be met. This includes, for example, that the pension commitment has to be made in writing and, moreover, clear information has to be provided about the type, form, conditions for and amount of the future payments that can be expected. Furthermore, the commitment may not include any reservation that could lead to the entitlement to the pension or the pension payment being reduced or withdrawn.

The BFH, in its ruling of 6.12.2022 ( case reference: IV R 21/19), decided that, for tax purposes, the creation of a pension provision may only be allowed if the reservation expressly complies with the narrowly defined circumstance, which has been recognised by the German labour courts, that would permit the entitlement to the pension or the pension payment to be reduced or withdrawn solely in exceptional cases.

By contrast, unrestricted reservations of the right of cancellation where the validity or scope under employment law is doubtful or unclear would be harmful. 

Outcome: In the case in question, unrestricted reservations of the right of cancellation were likewise used since the reservation of the right to make changes to the pension commitment meant that amendments could be made at the discretion of the employer. Accordingly, in the case in question, the creation of a provision was not legitimate. 

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