Update: 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
On 23 December 2016, the German Federal Ministry of Finance (BMF) published a circular stating its legal position on the impact of the distribution ban for amounts resulting from the revaluation of the pension provisions (Sec. 253 Para 6 HGB) to the usually tax-motivated execution of profit and loss transfer agreements. The legal uncertainty resulting from this friction was already pointed out in our earlier newsletter dated 23 May 2016.
Ultimately, the BMF wants the new rules to be applied word-by-word, meaning that the distribution ban pursuant to Sec. 253 Para 6 HGB should have no effect on the transfer of profits and losses, which is mandatory for maintaining fiscal units according to Sec. 14 Corporate Income Tax Law (KStG). Thus, the profit calculated in consideration of the new rules must be transferred in total to the controlling company in order to avoid jeopardizing the fiscal unit.
Notwithstanding the above, the BMF refers to the legally available opportunity to book profits to capital reserves on a case-by-case basis according to Sec. 14 Para 1 Sentence 1 Number 1 KStG. This presupposes reasons which economically justify this step according to a reasonable business evaluation. In general, since the positive effect on the profits resulting from the extended period for determining the applicable interest rate will likely turn back in future, there should be reasonable grounds for establishing capital reserves in terms of risk provisioning. However, on the other hand the Ministry’s circular might encourage local tax authorities to restrictively acknowledge companies’ reserve building.
Furthermore, the Ministry’s circular mentions some kind of “equity ruling” for reserves build in the past, although its scope of application is unfortunately only described vaguely. The purpose of this ruling seems to focus on cases, where the 2015’ accounts of a controlled company already consider the ten year-period for determining the interest rate on a voluntary basis and excess profits were not transferred to the controlling company but booked to the capital reserves. As a grandfathering rule, the BMF stated that the accrual of undue reserves will not be challenged, where such reserves are dissolved and transferred up to the controlling company within the period up to the next balance sheet date following Dec 31, 2016.
The BMF’s circular can be downloaded on the official Ministry’s website.