The law for an immediate tax investment program to strengthen Germany as a business location, passed in July 2025, provides for a gradual reduction in corporate income tax: between 2028 and 2032, it will fall by one percent annually from the current 15% to 10% of taxable income.

This gradual reduction may already have an impact on the valuation of deferred taxes in the coming annual financial statements, particularly in connection with the creation of pension provisions. These must be implemented using a technically correct yet practical valuation approach.

Due to the different valuation approach in the tax balance sheet compared to the commercial balance sheet or IFRS accounting, the tax provision values are generally significantly lower than the values reported under commercial law or international accounting standards. These temporary differences result in deferred taxes, which are measured based on the tax rate applicable in the future at the time the differences are reduced. 

Under the previous uniform corporate income tax rate of 15%, deferred taxes were reversed over the entire duration of an obligation. Due to the future gradual reduction in the tax rate, the valuation of deferred tax items must now be adjusted accordingly.

Although options of varying complexity have been presented within the profession to quantify this effect precisely, a complete actuarial assessment in advance is costly and only of limited reliability due to biometric uncertainties. We therefore recommend the following approach for an appropriate estimate:

  1. Determination of the provision values calculated as of the current valuation date for accrued entitlements and current benefits
  2. Carryforward of the commercial balance sheet/international provision value, taking into account interest expense and deduction of expected pension payments until 2028 and then gradually continuing until 2032
  3. Carrying forward the tax provision value, taking into account interest expense (6% p.a.) and deducting expected pension payments until 2028 and then gradually continuing until 2032
  4. Determination of the differences from 2. and 3. on the individual reporting dates between 2028 and 2032
  5. Calculation of deferred taxes at a rate of 1% (corporate income tax reduction steps between 2028 and 2032) of the differences determined in 4. for the respective years

These calculation steps must be performed for each balance sheet date until the reduction is fully implemented in 2032, as future provisions that have not yet been earned as of the current reporting date and future biometric changes (death, disability, early retirement) may have an impact on the amount of provisions and thus on deferred taxes.

Other approaches, such as spreading the difference evenly over the average duration, considering discounted cash flows, or using a flat mixed tax rate, can also lead to sufficiently accurate results.

Compared to pension obligations, the effects of subsidies, anniversary bonuses, partial retirement, or similar obligations are relatively minor, meaning that further analysis is rarely necessary or appropriate for reasons of materiality.

Our Occupational Pension Schemes & Actuarial Services team will be happy to advise you on whether the effects described above need to be analysed in more detail and, if necessary, determined in your company, and which approach would be most appropriate in this regard.

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