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Pension provisions – Salary sacrifice arrangements where there is a sole shareholding managing director

The recognition of a pension provision requires a salary sacrifice within the meaning of the Occupational Pensions Improvement Act (Gesetz zur Verbesserung der betrieblichen Altersversorgung, BetrAVG). If a GmbH (a German limited company) enters into a pension commitment for its sole shareholding managing director on the basis of salary sacrifices then this requirement cannot be fulfilled because s/he is not an employee within the meaning of the BetrAVG.

The maximum amount at which pension provisions may be recognised is the net present value of the pension obligation. In the case of a pension beneficiary who is still working, the net present value of the pension obligation is the product of the present value of the future pension payments at the end of the financial year minus the present value of the constant annual amounts on the same date. In the case of salary sacrifice, however, the applicable amount is at least the present value of the vested future pension benefits, in accordance with the provisions of BetrAVG, at the close of the financial year.

The Federal Fiscal Court, in its ruling from 27.5.2020 (case reference: XI R 9/19), had to decide if the provision for an employee-financed pension commitment of a GmbH to its controlling shareholding managing director should be recognised at the lower net present value. This provision was the result of providing a pension commitment on the basis of salary sacrifices that included a contractual agreement with respect to the vesting of future pension benefits. Contrary to the view of the fiscal court, the judges concluded that, in the case of a controlling shareholding managing director, the provision for the employee-financed pension commitment should not be measured at the (higher) present value, but instead at the net present value. To substantiate this, the court argued that salary sacrifice is not subject to the provisions under BetrAVG, rather that the pension commitment is vested (only) because of a contractual agreement.

Please note: The BFH expressly emphasised that it considered the inherent preference given to pension provisions for employees within the meaning of the BetrAVG to be constitutional.

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