bAV: How to optimize taxes and social security contributions

Company pension scheme: Tax burdens and social security contributions play an important role in the settlement of occupational pension entitlements. In the guest article, Dr. Fiala and Peter Schramm show optimisation possibilities.

Severance pay for company pension schemes (bAV) as a tax-saving model

The State Social Court of Baden-Württemberg (ruling of 24 March 2015, file no. L 11 R 1130/14) decided that the early settlement of occupational pension entitlements is also to be treated as pension benefits, Section 229 SGB V. Accordingly, neither contributions to unemployment insurance nor to statutory pension insurance are to be paid on it. Added to this is the reduction of income tax via §§ 19, 34 EStG. The employer will have to make sure that the taxes owed are withheld and paid – even if the payment to the employee is made directly by the occupational pension fund (e.g. direct insurance, pension fund) or if a creditor of the employee enforces this by sovereign attachment. The employer may be obliged to pay compensation for the occupational pension commitment for reasons of consideration for the employee, Section 241 II BGB.

 

Ban on severance payments in connection with the termination of employment

The probability that a company pensioner will experience the insolvency of his employer is up to more than 10 percent. These assets, which are often accumulated by the employer by waiving wages, are only secured if they have been paid out in full or have been settled beforehand. If the employer does not want to pay twice in the end, his severance agreement must be clearly and unambiguously formulated (BAG, ruling dated April 20, 2010, Case No. 3 AZR 225/08). In addition, there must not be a time connection with the termination of the employment relationship, § 3 BetrAVG.

 

occupational pension assets are based on the commitment under labour law – not on reinsurance

The present value of the commitment under labour law should be calculated using financial mathematics before severance payments are made, because the “reinsurance” (e.g. the assets of a relief fund or direct insurance) can be significantly lower, for example due to acquisition costs, lending, termination or pledging by the employer. Often, brokers or agents still provide the employer with the “model of a pension scheme”:

The actuary can then point out which gaps in coverage have arisen in the occupational pension scheme, with the employer’s obligation to pay the employees and the possibility of recourse against the occupational pension management consultant. According to case law, such “models” regularly contain gross errors, such as the employer’s reservation of the right to reduce or discontinue its occupational pension benefits at any time. Since 01.01.2013, employment contracts have been subject to AGB control, so that the reservation of the right to revoke the occupational pension commitment at any time is also invalid, § 308 No. BGB.

 

Destruction of the occupational pension commitment through challenge

As a rule, it will be possible to find reasons – at least if employer and employee agree on this – why the occupational pension commitment can be challenged and was null and void from the outset. Then all restrictive regulations of the Betriebsrentengesetz (BetrAVG) will have been removed and the transaction can be reversed. A one-off additional payment of wages agreed for this reason can be arranged in a tax-efficient manner. As a rule, after termination of the employment relationship, it is no longer burdened with social security contributions in any way.

 

Destruction of deferred compensation or reinsurance through revocation

At least for non-legal persons as employers, the “perpetual” possibility of revocation due to ineffective revocation instructions exists at least for a large proportion of the life insurance policies concluded from 1995 to 2007, also for reinsurance or deferred compensation.

According to BGH rulings, the full premiums plus all interest benefits drawn by the insurer can be reclaimed here as well – the insurer can only deduct something for the risk assumed. This then provides a greater financial basis for paying the employee a higher payment than would be the case if the life insurance policy were simply surrendered.

 

Settlement of current occupational pension plans

Well-advised companies offer their company pensioners high severance payments for current pensions. These are based, for example, on the provisions that currently have to be formed for pensions under the German Commercial Code (HGB). For the employer this is balance sheet neutral. However, it thus avoids an increasing need for provisions under HGB in the next few years due to falling interest rates and thus future balance sheet risks.

 

Transfer of pension obligations to pensioner company

The Federal Labor Court (BAG, ruling dated March 11, 2008, Case No.: 3 AZR 358/06) decided that employers can transfer their pension liabilities to a pensioner company by way of a spin-off, and without the pension recipients having the right to object. Nor does it require the approval of the Pension Security Association (PSV) (Regional Labour Court Cologne, judgement of 08.12.2005, ref. 6 Sa 1149/05). If the employer does not provide the pension company with sufficient capital for the pension payment, including legal adjustments, the (also former) employee only has a claim for damages – and this can then also become time-barred. Through “legal form shopping”, i.e. the targeted use of foreign company forms in Germany, the co-determination of the works council can regularly be undermined, as the Co-Determination Act is only applicable to domestic company forms.

 

Foreseeable insolvency of the pensioners’ company without state liability?

If the pensioner company becomes insolvent after years, the now responsible insolvency administrator cannot proceed due to a joint liability of the employer, because he is not authorized to do so (BGH, decision of 20.06.2013, Az. IX ZR 221/12). Employees affected would therefore have to become active themselves, regularly obtain information and, with professional support, ascertain whether the capital of the pensioners’ company is (still) sufficient – if necessary, a declaratory action for a declaratory judgement would be necessary because of a claim for damages that might already be foreseeable.

Employees should in particular be able to prove that the BAG’s requirements for capital resources were met, since shorter (i.e. realistic instead of very cautious) life expectancies and higher (i.e. realistic) market interest rates at the time of the decision (e.g. 5 % instead of a cautiously low one such as 1 %) were expected more frequently; because this means that future pension cuts and lack of adjustments can be expected.

In the case of HypoVereinsbank, HypoRealEstate (HRE) had been spun off – punctually after five years, when the statute of limitations according to § 133 UmwG came into force, a finance minister appeared in front of the camera and announced that the state would only guarantee HRE for the time being. This later became payments at the taxpayer’s expense of up to more than €100 billion. Similarly – this is what members of parliament fear (BT-Drucksache 18/1959 of 01.07.2015) – the nuclear waste repository could be disposed of by energy companies at the taxpayer’s expense. In the meantime, a “Deconstruction and Disposal Costs Subsequent Liability Act” is being discussed by the legislator.

Retirement companies and utility companies in the group without PSV protection

The BAG ruling of 2005.2014 (NZA 2015, 225) clarified that a bAV commitment issued by a group company – e.g. the group parent – which is not itself also the employer of the employee in question does not constitute a company pension commitment covered by the BetrAVG and therefore does not fall under the insolvency protection provided by PSV aG. This means that not only are no PSV contributions payable – vesting, for example, can also be freely arranged outside of the BetrAVG with a better binding effect on the employer and pure contribution commitments are also possible.

In principle, this means that a pension commitment to employees of another group company by a group company that is not itself an employer may be an insurance business subject to licensing under the ISA. The Federal Financial Supervisory Authority could initiate criminal proceedings and order the liquidation if – as is usually the case – no licence for the insurance business is available. It would also be conceivable to convert the group company into an insurance company with all its obligations and a considerable need for additional financial reserves due to other calculation bases.

Sufficient for the necessity of a BaFin approval is that the group company formally assumes a performance obligation (on bAV) of a third party (the employer). For reasons of liability shielding, it cannot be assumed in principle that the group companies – also with regard to pension commitments – will pursue a uniform strategy and, if necessary, stand up for each other.

If this were the case, however, BaFin would not accept any insurance business subject to supervision even without a genuine legal obligation to assume joint liability. Whether in individual cases the criterion of assumption of benefits (for third parties) is materially not fulfilled will have to be examined on the basis of the group contracts, because splitting up into liability blocks of different corporations also regularly serves to limit the risk between the group companies and does not lead to a joint and several liability, especially since the occupational pension commitment is regularly not additionally granted by the employer in the group.

 

Simple solution also for medium-sized businesses

The Carta-Mensch-Stiftung, for example, is concerned with the development of such occupational pension schemes outside the restrictive regulations of the BetrAVG by corporate group foundations. For medium-sized companies, they even offer a simple trustee foundation solution of their own, if necessary with reinsurance of only the extreme longevity risk. This is done by taking advantage of the fact that, for example, if there are only up to 100 pension commitments, there is no collective that justifies the acceptance of insurance business. Another model developed there is the very favourable financing of medium-sized companies – as well as infrastructure projects or municipalities – through the sale of BGB life annuities. These can also be acquired by employees, which means that they are not covered by occupational pension schemes. Properly designed, it is neither insurance nor does it fall under the concept of financial instruments.

 

Bath bench for entrepreneurs?

On 23.06.2015, the head of a cartel office complained that fines amounting to millions were not being collected through the restructuring of corporations, because the companies concerned would simply disappear. It is true that a corporation can be deleted directly from the commercial register if it is without assets – liquidation is not necessary. The European Court of Justice had already decided in its judgment of 5 March 2015 (Case C-343/13) “that the obligation to pay a fine passes to the acquiring company, which is imposed after the merger by a final decision but punishes labour law infringements committed by the transferring company before the merger”.

The Cartel Office will presumably also have to deal with the doctrine of double jeopardy, since for a corporation to cease to exist it is not sufficient for it to be deleted from the commercial register, but it must also be assumed that it is without assets. The ability of deleted corporations to take sides is regularly assumed in active litigation, for example due to a group liability or open recourse claims (DNotI of 21.04.2005; BGH, decision of 20.05.2015, Ref. VII ZB 53/13) A typical hanger would be bribe payments by the occupational pension insurance brokers to the works council or personnel managers (press release of StA Ulm of 08.07.2009). With regard to conceivable assets, insolvency proceedings could also be considered if the creditor first advances the costs of the proceedings – as an alternative to the emergency manager or, for example, a supplementary liquidator.

 

 

by Dr. Johannes Fiala and Dipl.-Math. Peter A. Schramm

 

With friendly permission of

 

www.procontra-online.de (published on 02.03.2016)

 

Left:

http://www.procontra-online.de/artikel/date/2016/03/bav-so-optimieren-sie-steuern-und-sozialabgaben/

http://www.procontra-online.de/artikel/date/2016/03/bav-so-optimieren-sie-steuern-und-sozialabgaben/seite/1/

http://www.procontra-online.de/artikel/date/2016/03/bav-so-optimieren-sie-steuern-und-sozialabgaben/seite/2/

Our office in Munich

You will find our office at Fasolt-Strasse 7 in Munich, very close to Schloss Nymphenburg. Our team consists of highly motivated attorneys who are available for all the needs of our clients. In special cases, our law firm cooperates with selected experts to represent your interests in the best possible way.


About the author

Dr. Johannes Fiala Dr. Johannes Fiala

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.
»More about Dr. Johannes Fiala

On these pages, Dr. Fiala provides information on current legal and economic topics as well as on current political changes that are of social and/or corporate relevance.

Arrange your personal appointment with us.

Make an appointment / call back service

You are already receiving legal advice and would like a second opinion? In this case please contact Dr. Fiala directly via the following link.

Obtain a second legal opinion

The first telephone call about your request is free of charge.