Focus: pension liabilities

This article was written by our expert Dr. Georg Philipp Siebenlist

Pension commitments are a central component of retirement planning and are a significant financial obligation for companies in Germany. As a remuneration component, they not only impact long-term liquidity planning, but also accounting and the tax position. The tax treatment of pension liabilities involves complex rules for calculating provisions that affect a company's tax burden. The most recent case law dealt with the recognition of a tax reserve when transferring pension liabilities as well as the measurement of securities-linked pension liabilities. In this article, we present you selected recent decisions of the Federal Fiscal Court (BFH) and a provincial Fiscal Court.

BFH judgment of 23 October 2024 (file reference XI R 24/21) – tax reserves after taking over pension obligations

When employees change their workplace, their new employer could take over an existing pension commitment granted by their previous employer (direct pension commitment). In practice, the new employer normally takes over assets (e.g. claims under reinsurance policies or pension funds) in the amount of the fair value of the claims earned to date so that it is compensated accordingly for taking over the pension obligation. The fair value of the pension obligation is usually significantly higher than the amount recognised in the tax balance sheet in accordance with Section 6a of the German Income Tax Act (EStG), for which, among other things, a discount rate of 6% is prescribed.

On the next balance-sheet date after taking over the obligation, a profit is then recognised in the tax balance sheet due to the higher value of the assets. In the opinion of the tax authorities, no tax-reducing reserve under Section 5 (7) sentence 5 EStG could be recognised for such a profit, which would have resulted in an allocation of the profit over fifteen financial years in the tax accounts. This would mean a considerable liquidity relief for the new employer.

The BFH did not follow the opinion of the tax authorities. According to the BFH judgment published in February 2025, a profit-reducing tax reserve in accordance with Section 5(7) sentence 5 EStG can (also) be recognised for the profit from taking over a pension obligation. This is of great significance for business practice.

However, the judgement has not yet been published by the tax authorities in the federal gazettes, so that the general application beyond the individual case decided is currently open.

BFH judgment of 4 September 2024 (file reference XI R 25/21) – recognition and measurement of security-linked pension obligations

In practice, direct pension commitments are increasingly pre-financed by funds in order to reduce a financial burden in the payout phase – usually starting from retirement. Securities-linked commitments are becoming increasingly popular for this purpose. Securities-linked commitments are pension commitments where the amount of the pension benefit is linked to the financial performance of securities or reinsurance policies. The pension benefit can also be a one-time capital payment (in the amount of the fair value of the securities at retirement) for which there is a pension election option. Under commercial law, these obligations must then be measured at market value of the securities on a matching basis and offset, as applicable.

Despite the widespread use of securities-linked commitments, it was previously not possible to recognise such pension commitments as liabilities in the tax balance sheet if no minimum or guarantee amount was promised. In the opinion of the tax authorities, employees have no legal claim with respect to the financial performance of the securities. In addition, in the view of the tax authorities, uncertain increases or decreases in pension benefits can only be taken into account in the form of a provision once they have occurred (Federal Ministry of Finance (BMF) circular of 17 December 2002 - IV A 6 - S 2176). However, if employers are required to provide a minimum benefit, they will then insist that the securities backing of the earned benefits are high-rated, fixed-interest bonds which are not held for too long. Particularly in the period of low-interests, this has led to very unattractive returns for employees in the end. Often, both sides desire an investment form with a significantly higher risk and return profile, which appears significantly more attractive in the medium and long term. 

The BFH did not follow this opinion. According to its decision published in February 2025, securities-linked pension obligations without a minimum benefit commitment must also be recognised as liabilities for tax accounting purposes. Nevertheless, the measurement of the pension provision is not based on the fair value of the securities (as in the financial statements) but on the stricter tax provisions (Section 6a EStG). As a result, the pension provisions in the tax balance sheet are significantly lower than in the financial statements.

Federal Ministry of Finance: parallel payment of salary and pension to directors

Last year the Federal Fiscal Court (Bundesfinanzhof – BFH) decided that paying a pension and salary to a managing partner at the same time does not mean that the pension is to be classified as a hidden profit distribution. The tax authorities only partially adopted the principles of the judgment in their latest amendment of its Federal Ministry of Finance (BMF) circular. Cases of managing partners working part-time are critical. Read more about this topic in our article Corporate tax advisory in practice | Grant Thornton of September 2024.

Baden-Württemberg Fiscal Court (FG) judgment of 26 February 2024 (file reference 10 K 1444/22) – transfer of a pension commitment to a pension fund

Outsourcing of pension obligations is becoming increasingly popular. Not only accounting policy motives can play a role, but also the financially de-risking increasingly leads to the outsourcing of the obligations to external pension fund. This could avoid financial strains for the companies at an early stage. Pension funds are particularly suitable for this purpose, as outsourcing to them is encouraged in terms of tax accounting and payroll tax.

In a judgment of the Baden-Württemberg Fiscal Court of February 2024 (judgment of 26 February 2024 – 10 K 1444/22), which is currently pending at the Federal Fiscal Court (file reference: VIII R 19/24), the tax consequences of outsourcing a pension obligation for a managing director of a GmbH (corporation) were in dispute. In the opinion of the financial authorities, the strict arm's length principle should also be applied in cases where a pension obligation is outsourced to a managing partner. As a consequence, the tax authorities are of the opinion that the outsourcing of pension obligations of managing partners who reach the age of 65 before the pension obligations are outsourced is not in line with arm's length principle and, as a result, constitutes a hidden profit distribution by the corporation. In the case at hand, the pension commitment had been granted for the 60th year of age. 

The Baden-Württemberg Fiscal Court as court of first instance did not follow this opinion. The outsourcing of a pension commitment by paying a related premium does not constitute a hidden profit distribution. In the opinion of the Fiscal Court, it is irrelevant whether the transfer occurs before the contractually agreed minimum retirement age or before the age limit required by the tax authorities.

But it remains to be seen whether the Federal Fiscal Court will concur with the opinion of the lower court. 

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