Tax trap pension commitment

| Pension plan | The pension plan concept of the pension commitment has been recommended by many tax advisors in order to reduce taxes and increase liquidity in the company. However, this commitment can lead to coverage gaps in the company.
Experts estimate that more than 90 percent of all GmbH managing directors have been promised a pension for retirement that cannot be financed by the company. This is because many reinsurance concepts have gone off the rails with predominantly German endowment policies. Since the stock market crash in the years 2001 to 2003, the profit sharing and yield promises of German insurers have practically disappeared into thin air. Of the originally calculated promised return of around 7.0 percent, many insurers were left with just 4.0 percent or less. This means that for many commitments the necessary financial resources for later pension payments are lacking. With a term of 20 to 30 years, this results in coverage gaps of 40 to 50 percent until retirement at the age of 65. This is a fatal situation, as the tax authorities are paying increasing attention to the financial viability of pension commitments and often assume a hidden distribution of profits if they cannot be financed. The unfunded pension commitment comes up at the latest in the case of an anticipated succession, the sale of a company or a succession arrangement. What began as a tax-saving model can lead to unavoidable tax burdens and the threat of poverty in old age for the managing director. Numerous tax advisors are aware that the majority of their clients have become economically over-indebted as a result of pension commitments for these reasons. This may mean that insolvency is inevitable.
Problem company sale
Another disadvantage of the pension commitment is that when the GmbH is sold, no one really wants to buy a GmbH with an existing pension commitment. A lifelong obligation to pay an annual old-age pension of 36,000 euros to 60,000 euros is not something that any successor wants to tie to his leg. The liquidity of the company is at risk with such a high monthly charge. Especially if the pension commitment was only calculated at the low tax values. The risk of the buyer of the company is expressed in the fact that often less than half of the assets are available, which would be necessary for the payment of a lifelong pension. In addition to the classic restructuring, many financial service providers recommend building up further reserves. These are sometimes referred to as “outsourcing of pension commitments”. But this approach does little to change the liability of the Mittelstands-GmbH, nor does it change the fact that the financial resources to build up further reserves are rarely available.
Capital settlement as a lifeline
The tax advisor then often advises a lump-sum settlement of the pension commitment, as the continuation of the commitment with the payment of monthly old-age pensions is not financially viable in the long term and often only ends when the managing director reaches the age of 75 or 80. In the case of a lump-sum settlement at the age of 65, it is important that the corresponding agreement is precisely formulated in the text of the pension commitment and is in place. The text of many pension commitments is not up to date because important letters from the Federal Ministry of Finance (BMF) have not yet been taken into account. A settlement of the commitment will then often not be possible or will be treated by the tax office as a hidden contribution: The managing director must then pay taxes on the part of the pension that he has waived. So tax the non-existent income. An expert opinion on pension commitments helps to reduce liability in the event of an audit by the tax office. For the entrepreneur, the realisation that long-running contracts, especially when it comes to his own provision for old age, require a regular review of adjustments is bitter at first sight. In the case of the reorganization of pension commitments it is advisable to consult advisors, who first of all do not want to sell financial products, but are able to show the entrepreneur the most different ways.
Tax-neutral severance pay
As things stand today, a pension commitment can be settled using the so-called fifths rule or the personal tax rate. However, the current regulation means that although the pension commitment can be removed from the balance sheet in a tax-neutral manner in the case of congruent reinsurance, the severance payment is regarded as a taxable inflow for the managing director in the private sector. This presupposes that there are sufficient assets in the company for severance pay. Otherwise, there is a risk of partial taxation of unredeemed partial pensions due to the partial waiver of claims by the managing director. In the case of a full settlement of, for example, 500,000 euros, 100,000 to 200,000 euros in taxes are due immediately in the year of the settlement. This leaves only about 350,000 euros for retirement benefits. If this sum is annuitised, the managing director would then receive a life-long pension of just around 170,000 euros from the German pension insurance scheme. So only about half of the imagined retirement benefits.
Elegant and simple solution
However, there is an elegant and simple solution to these problems. via the deduction of special expenses, the tax payment in respect of the severance payment can be reduced or even waived. The establishment of a charitable trust foundation and the associated endowment of the foundation with assets leads to special expense amounts which the entrepreneur can use to reduce tax in his private tax return. The charitable foundation, which receives special tax incentives from the German government, has a number of valuable advantages for medium-sized entrepreneurs in addition to tax benefits, says Frank M. Strobelt of the Munich-based Gesellschaft für Stiftungsförderung (GfS). Thus, it is possible to solve the problem of business succession and the protection of life’s work by setting up a charitable trust foundation. Furthermore, the assets transferred to the charitable foundation are exempt from inheritance and gift taxes and are protected from creditors and other undesirable parties from a certain point on. In addition, due to its non-profit orientation, the trust foundation can be seen as an ideal PR/marketing instrument; the foundation’s credible public relations work also strengthens the company’s core business. At the beginning of July this year, the German Bundestag passed the “Law for the Further Strengthening of Civic Involvement”. According to the new law, founders will in future be able to deduct one million euros in special expenses (married couples two million euros) from their private tax returns within a period of ten years.
Tax advantages private assets
In the case of private assets of 600,000 euros contributed to one’s own charitable trust foundation (through, for example, rented real estate, securities, works of art), special expenses arise in the same amount, which can be freely used in the private tax return. And thus, under certain circumstances, lead to a tax-neutral treatment of the severance payment. At a private tax rate of 40 percent, this results in a tax refund of just under 240,000 euros in cash inflow over the next five to ten years. Depending on the taxable income, the tax refund may be higher or lower. If one invests this tax refund or the reduction in advance tax payments for ten years at, say, six percent, this results in additional private assets of almost 350,000 euros during this time. l
Dr. Johannes Fiala, Attorney Andreas M. Bosl, Management Consultant
(games&business Sept 2007, 146)

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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.
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