Company pension scheme: Liability trap due to severance clause at partial value
The Federal Minister of Finance (BMF) has given the sale of company pension products a good opportunity to talk to the management: the main focus is on the existential dangers of tax-damaging pension commitments. This is an opportunity to take a closer look at the pension commitment as a whole and to close existing gaps in coverage. The “new” opinion of the Federal Ministry of Finance (BMF) that the structuring of the settlement of a pension commitment at the so-called partial value can be detrimental to taxation. Probably more than 90% of all pension commitments are affected. The BMF sets a deadline of 31.12.2005 for the adjustment. The regularly tax-damaging severance payment clauses in the commitments must be adjusted or redesigned. If the adjustment is not made, the pension provision may no longer be recognised in the balance sheet. The consequence is that the committing company falls into a liquidity and tax trap that threatens its existence. A prerequisite for the recognition of a pension obligation as a provision in the tax balance sheet is, in accordance with § 6a para. 1 No. 2 EStG requires, among other things, that the pension commitment does not contain a tax-damaging proviso on the basis of which the pension benefit or entitlement can be reduced or withdrawn. In previous commitments, no attention was paid to this – although the Federal Fiscal Court (Bundesfinanzhof, BFH) has already decided this in its ruling of 10.11.1998 (Ref. I R 49/97). The BFH had previously regarded it as harmful for tax purposes if a pension expectancy was subject to the proviso that the commitment could be settled at any time at the partial value. The BMF has now adopted the contents of this BFH opinion in its current letter dated 6 April 2005. The going-concern value is lower than the present value of future benefits due to the successive accumulation of the pension provision. Severance clauses based on the going-concern value therefore lead to a non-recognition of the pension provision. However, if the severance payment is based on the present value of future pension benefits at the time of the severance payment, the severance payment clauses are not tax-deductible. Due to the written form requirement for pension commitments, the calculation method for determining the severance payment amount must be clearly and precisely set out in a written agreement. In this case, it is often necessary for financial service providers to work together to check the PZ, as well as a lawyer and an actuary or expert for occupational pensions. These administrative principles should be applied in all pending cases. However, for reasons of protection of confidence, severance payment clauses based on the going-concern value which were agreed up to the date of publication of the new BMF letter in the Federal Tax Gazette (BStBl.) will not be objected to, provided that they are subsequently adjusted in writing by 31 December 2005. Careful attention should be paid to the deadline, because the backdating practically often means an approach to the suspicion of tax evasion. By physical examinations a backdating can be proved regularly with the help of a criminal investigation department.
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Dr. Johannes Fiala has been working for more than 25 years as a lawyer and attorney with his own law firm in Munich. He is intensively involved in real estate, financial law, tax and insurance law. The numerous stages of his professional career enable him to provide his clients with comprehensive advice and to act as a lawyer in the event of disputes.
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