Creation of Provisions for Old-Age Leisure Time

According to the general principles of proper accounting, provisions must be recognized in the commercial balance sheet for uncertain liabilities, which also applies to the tax balance sheet in accordance with the so-called authoritative principle. The requirements for the creation of provisions include, on the one hand, the probability of the future occurrence of a liability that is uncertain in terms of reason and/or amount. Secondly, this liability must have been caused economically in the period prior to the balance sheet date. In addition, the debtor must seriously anticipate a claim.

In its ruling dated June 5, 2024 (case no. IV R 22/22), the German Federal Fiscal Court (BFH) agreed with the tax deductibility of a provision for old-age leisure time if this is linked to operational circumstances such as length of employment. In the case in dispute, the plaintiff’s employees were entitled to two additional paid days off for each full year of employment in addition to their contractual annual leave in accordance with the standard collective agreement, provided they had been with the company for at least ten years without interruption and had reached the age of 60. The economic causation of the accrued liability in the period prior to the balance sheet date and therefore the employer’s shortfall in meeting its benefit obligations to the employees was in dispute.

Due to the employer’s commitment under the collective bargaining agreement, it was sufficiently probable in the case in dispute that an obligation under employment law to grant old-age leisure time would arise. The liability was only uncertain in terms of amount. However, according to the relevant previous BFH case law, a provision must also be formed for an uncertain liability that will only arise in the future.

The BFH also ruled that the economic cause of the uncertain liability lay in the period before the relevant balance sheet date or in the past. Contrary to the view of the tax office, the employees did not have to work overtime for the additional days off in order to achieve a performance surplus. A reference to the past already arose through the linking of the number of future days off to the length of employment. The old-age leisure time was therefore remuneration for work performed during the period of employment and for not exercising the right of termination or for loyalty to the company during the vesting period. In this respect, the employees performed in advance, meaning that there was no pending situation detrimental to tax accounting. The deferral of payment until shortly before retirement was merely a maturity agreement. The employer was therefore in arrears. This is because he/she had paid less on the balance sheet date than he/she was obliged to pay in accordance with the supplementary collective agreement.

In the opinion of the BFH, it is also irrelevant, based on the so-called going concern principle, that employees who leave the company before reaching the required age limit cannot claim at least a pro rata entitlement to old-age leisure time.