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This article was written by
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
Certified Tax Advisor, Manager, National Office Tax & Legal
Early retirement plans allow employees to be released from their duties prior to the start of their old-age pension while continuing to receive a portion of their salary. For companies, the commitment to pay wages to employees during this future period of release constitutes a liability for which provisions for contingent liabilities must be established under both commercial and tax accounting standards. In its ruling of February 5, 2026 (case no. IV R 11/24), the German Federal Fiscal Court (BFH) had to decide whether a company was entitled to create a provision even for employees who had not yet declared their participation in the early retirement plan. Another issue for assessment was the date from which the provision should accrue.
In the case in question, a limited partnership offered an early retirement plan to certain executives. Under this plan, these executives could take a leave of absence from work for a period of up to three years prior to reaching the standard retirement age, while continuing to receive 70% of their annual gross compensation. The prerequisite was that the duration of the employment contract had to be at least 25 years upon reaching the standard retirement age, and a separate leave agreement had to be concluded prior to the start of the leave.
In connection with the benefits to be provided under this so-called 70% rule, the limited partnership established provisions for contingent liabilities, both for employees who were already in the leave-of-absence phase and for those who had not yet met the requirements for such leave. The provisions were calculated such that the expense determined in accordance with actuarial principles was spread over the entire period of service of the respective employee. The tax office recognized the provisions only with respect to those employees with whom a separate leave-of-absence agreement had already been concluded as of the balance sheet data (so-called “actual cases”).
With regard to the general accounting treatment, the BFH agreed with the opinion of the Düsseldorf Fiscal Court of first instance. Accordingly, the KG was entitled to recognize provisions for contingent liabilities with respect to the employees to whom it had offered a leave of absence from work in exchange for payment of 70% of their salary, for the wage payment obligations presumably arising from future periods of leave.
This is because the KG was obligated - in part subject to the condition precedent of the employee having completed at least 25 years of work - to grant its eligible employees a leave of absence in accordance with the 70% rule. In this respect, it was in default of performance (prior to the employee reaching the standard retirement age). The employees, however, had already earned the right to leave through their prior performance - their work. Thus, the KG provided less than it was required to provide under the employment contract in total for the services rendered by the contractual partner up to that point. There was therefore an obligation to record a provision. With regard to the so-called actual cases, this was also not further disputed between the KG and the tax office.
In the opinion of the BFH, however, the employees with whom the KG had not yet entered into a separate leave-of-absence agreement as of the relevant balance sheet data were also to be included. This is because, in this respect as well, the KG provided less in connection with the employees’ future leave of absence than it was obligated to provide under the employment contract in exchange for the employees’ work. Based solely on their employment contracts, the employees already had a claim to release from work, and the main components of the agreement - the duration of the release and the compensation to be paid in that regard - had been established. Furthermore, the KG could no longer unilaterally withdraw from its obligation. However, the subsequent separate leave-of-absence agreement regulated only individual ancillary provisions, such as a non-compete clause for the employee.
Given the number of employees who opted for leave of absence in the dispute, there were more reasons in favor of than against the future creation of the liability.
With regard to the recognition of the amounts, the Düsseldorf Fiscal Court held that the respective provision amounts for the affected employees should be accrued in equal pro-rata installments from the date on which the civil law claim to future leave of absence arose (conclusion of the leave of absence agreement) until the scheduled start of the leave of absence. In the opinion of the BFH, however, the contractually stipulated start of the respective employment relationship was to be taken as the basis; in this respect, it thus concurred with the opinion of the KG.
This is because the compensation to be paid by the KG during the leave of absence constitutes remuneration for the services rendered by its employees during past years of work. This refers not only to a specific period of employment lasting a few years, but to the entire period of employment. In this respect, the BFH’s case law on the creation of provisions for anniversary bonuses must be applied, according to which the amount of the provision must be based on the employee’s length of service up to the anniversary. Although length of service typically serves a dual function in cases of anniversary bonuses - that is, it determines both the existence of the claim and its amount - in the case at hand, the duration of at least 25 years of employment did not directly influence the amount of compensation payable under the 70% rule. However, this does not justify assuming a fundamentally different system when valuing provisions for early retirement plans.
The possibility that employees may leave the company before the start of the leave period must be taken into account by applying a turnover adjustment. The Düsseldorf Fiscal Court will have to determine the details in further proceedings.
Notice:
The BFH's decision provides greater legal certainty in practice regarding the valuation of provisions related to an early retirement plan and is therefore to be welcomed.