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Tax-reducing provision for age-related free time

Businesses that give their employees additional days off from work in the form of age-related free time can create tax-lowering provisions for this.

The Cologne tax court, in its decision of 10.11.2021 (case reference: 12 K 2486/20) had to rule on employees who, under the framework agreement on general working and employment conditions, were entitled to additional paid free time of two working days for each full year of their period of service if they had worked for the business without interruption for at least ten years and had reached the age of 60 years. In the course of a tax audit, the local tax office had refused to accept the (tax-reducing) provision for liabilities of uncertain timing or amount that had been created for this because the requirements had not been satisfied. According to Section 249(1) of the German Commercial Code, provisions may only be created for liabilities of uncertain timing or amount. Therefore, there has to be a liability that is uncertain in terms of the reason and/ or the amount. The local tax office was of the opinion that that these conditions were not present because, in particular, the employees had not performed additional services that the business had to pay for. 

The Cologne tax court however took a different view. The business’s liability to give additional days off from work arises already before the time off work commences and arises for economic reasons. The business had bindingly committed to give further days off from work, the employees contributed their work effort as a preliminary input and the respective counter-performance will, in contrast, only be provided by the company in the future. The fact that the commitment is linked to the past period of service and to the future company loyalty of the individual employees does not preclude this. 

An appeal against the ruling by the Cologne tax court is however already pending before the Federal Fiscal Court (Bundesfinanzhof, BFH). In response to the appeal against the denial to grant leave to appeal by the fiscal administration the BFH allowed the appeal (case reference: IV R 22/22), so that there will be a supreme court decision shortly.

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