Earning reserves for the assumption of pension liabilities

If liabilities that were subject to recognition prohibitions, restrictions or valuation reservations by the original obligor are assumed by a third party, they must be recognized in the balance sheet in the same way as they would have been recognized by the original obligor if they had not been assumed (Section 5 (7) sentence 1 of the German Income Tax Act (EStG)). If the corresponding balance sheet approach results in a profit, a profit-reducing reserve can be formed in this respect, which must be released over a fixed period of time (max. 15 years) to increase profits. In its ruling of October 23, 2024 (case no. XI R 24/21), the German Federal Fiscal Court (BFH) had to clarify whether this reserve may also be formed for a profit from the assumption of a pension liability that is to be valued in accordance with the special reserve of Section 5 (7) sentence 4 EStG.

In the case in dispute, a limited liability company (GmbH) took over the pension commitment of its sole shareholder, which had previously been granted to him as an employee at another company. The assets transferred to the GmbH for this purpose (life insurance, receivable from its sole shareholder) were recognized in the balance sheet as a transfer profit, for which the GmbH initially formed a reserve and then reversed this in installments. The tax office deemed this inadmissible and increased the GmbH’s profit by the remaining reserve.

The tax court and BFH disagreed with this. The wording of the law does not speak against, but rather in favour of being allowed to create a reserve for the profit from an assumed pension liability. Section 5 (7) sentence 4 EStG does not establish a new, fourth category in addition to the case groups in sentences 1 to 3. Rather, the reserve merely stipulates a special valuation of the assumed liability for some of the transfer cases in sentence 1. However, this does not exclude the admissibility of a reserve.

The BFH also rejects a restrictive interpretation of the reserve in Section 5 (7) EStG, contrary to its intended wording. The reserve introduced into the EStG together with Section 4f in 2013 was intended, among other things, to favour the portability of pension commitments. It would therefore be inappropriate to place assumed pension liabilities in a worse position than other assumed liabilities.