New German GAAP regulations for the valuation of pension provisions / Fiscal unities in Germany in jeopardy over potentially non-compliant execution of profit and loss transfer agreement
New accounting regulations for pension accruals have been introduced with the German transformation of EU-Directive 2014/17/EU. New rules entered into force on 21st March 2016 and amended accounting rules on pension provisions according to Sec. 253 Para 2 HGB.
Previously, pension provisions were usually valued according to the individual pension maturity discounted with the average market rate of the last seven years (instead of the individual maturity a lump-sum maturity of 15 years was also accepted). Due to the current low-interest-rate phase following the financial and economic crisis in 2007/2008, the average market rate significantly decreased, resulting in substantial increases to pension provisions being required.
New regulation for determining the interest rate for discounting purposes
Now, with the introduction of the new rules, companies are allowed to valuate the pension provisions with an average interest rate based on the last ten financial years. In practice, extending the rolling average period for determining the average interest rate will result in significant reliefs regarding the pension provisions which are directly recognized in the P&L.
Going along with this a distribution ban for the amounts resulting from the revaluation of the pension provisions was incorporated into the law (Sec. 253 Para 6 HGB). The distribution ban is linked to the difference that results from the extended average period. Profits may only be distributed if any remaining reserves (plus profit carried forwards and minus loss carried forwards) at least equal to the difference. This mechanism conforms to the distribution ban as set out in Sec. 268 Para 8 HGB introduced by the Accounting Law Modernization Act (BilMoG).
Unresolved determination of profit to be transferred
An unresolved issue of the new regulation arises in relation to the implementation of profit and loss transfer agreements, which are usually tax-motivated. Whilst Sec. 301 German Stock Corporation Act (AktG) refers to the distribution ban as set out in Sec. 268 Para 8 HGB and therefore limiting the profit transfer by law, a reference to the newly introduced distribution ban in Sec. 253 Para 6 HGB is missing. For the purpose of Sec. 14 Corporate Income Tax Law (KStG), which demands the factual execution of the profit transfer agreement by transferring the “full profit”, it is unclear, whether or not the profit transfer also includes the difference that is not distributable pursuant to Sec. 253 Para 6 HGB. As the new regulations may apply to the financial statements as of 31st December 2015, this issue is highly topical.
(Preliminary) Interpretation of the Federal Ministry of Finance (BMF)
The above mentioned issue was addressed during the legislative procedure, but has not finally been clarified. However, the Federal Ministry of Finance (BMF) has given a preliminary assessment to a Member of the German Parliament and prefers a literal interpretation of the new regulation. Thus, as there is no explicit limitation of the distributable profits and the profit and loss transfer agreement, such agreement is only considered “factually executed” when the non-distributable difference is transferred as well. Otherwise the fiscal unity would, under the ministry’s guidance, have to be denied. In the interest of legal certainty, however, the BMF should promptly clarify its position by means of an official BMF circular.