Tax & Legal

In a recently published decision, the Supreme Tax Court has, in some aspects, facilitated the tax recognition of employee-financed pension commitments for shareholder managing directors of a limited liability company (GmbH) but at the same time it also set some limits.

When testing the arm's length nature of the interest rate on a direct pension commitment financed through deferred compensation in favor of a shareholder-employee, the interest rate agreed for the similar pension promise in favor of an employee who is not a shareholder and who is employed in the same company is not a suitable yardstick, the Supreme Tax Court said in a most recently published decision.

The Supreme Tax Court has held the annual cost of a pension promise to a former owner/manager who retired before the pension date to be a hidden distribution.

The Supreme Tax Court has handed down four judgments on pension promises to managing directors who are also majority shareholders specifying rules for distinguishing allowable business expenses from disallowable “hidden distributions”.

The finance ministry has issued a decree calling for a probationary period of 2-3 years before promising a pension to a director who is also a shareholder.