Provisions for early retirement obligations – the Federal Fiscal Court clarifies accumulation over time

Provisions for early retirement obligations – the current Federal Fiscal Court decision

Early retirement schemes are a widely used tool in personnel policy. But presentation in the accounts has always thrown up complex questions, particularly related to the recognition and measurement of provisions. In its judgement handed down on 5 February 2026 (IV R 11/24), the Federal Fiscal Court (Bundesfinanzhof) made significant clarifications, after the judgement from the lower court, Düsseldorf Fiscal Court, on 24 May 2024 (3 K 2044/18 F).

In the case at issue, employees on certain hierarchy levels who had been at the company for 25 years were given the opportunity to take a three-year leave of absence before reaching the standard pension age while still receiving 70 percent of their previous pay. The following article shows the key statements of the decision and puts it into its place for practice.

1. Provisions for early retirement obligations in principle

According to current Federal Fiscal Court case law, provisions for obligations for early retirement schemes may already be recognised before the start of the leave period. The condition for this is the existence of a contingent liability as defined by section 249(1) of the German Commercial Code (Handelsgesetzbuch–HGB), which is to be taken into account for tax under section 5(1) of the Income Tax Act (Einkommenssteuergesetz–EStG).

A contingent liability not only exists if the amount is uncertain, but also if its coming about in principle is also uncertain, as long as this is overwhelmingly probable. Düsseldorf Fiscal Court held that a contractual commitment to paid leave in return for reduced remuneration constitutes a sufficiently fixed obligation. This also applies if the actual start of the leave period depends on still another separate individual agreement, such as laying down a prohibition on working or non-competition. The determining thing is that the main components of the contract have already been set as binding and the employer cannot release himself from these unilaterally.

Furthermore, the obligation must have been economically caused in the past. The Düsseldorf Fiscal Court held that remuneration paid during the leave period constitutes pay for work done in earlier years of employment. This claim is earned through long years of loyalty to the company; an outstanding settlement amount comes about that justifies recognising a provision under liabilities. 

The Federal Fiscal Court confirmed these principles and clarified that provisions are also to be recognised for employees with whom no individual leave agreement has been concluded as of the balance sheet date. The only thing that counts is whether claiming the commitments can objectively be seriously expected. In the case in dispute this was given due to the high attractiveness of the offer and to previous experience.

2. Measurement of the outstanding settlement and accumulation of the provisions

The question that is of particular practical importance is about which period the settlement amount for the early retirement obligation is to be accumulated over. While Düsseldorf Fiscal Court based its decision on the date when the claim to the leave came about under civil law, the Federal Fiscal Court expressly rejected this view. The Federal Fiscal Court’s view is that the expected settlement amount is to be distributed over the entire period from the beginning of the employment. This introduction of rules on early retirement particularly results in an effect to make the amount up. This is determined by the economic cause across the entire work performed up till that date, regardless of the date when the claim comes about under civil law.

The Federal Fiscal Court also specified that:
if the change takes place within a group, the contractual start date is to be taken as the basis.  If periods of employment at other group companies are credited, this may also need to be taken into account in calculating the outstanding settlement. 

In this way the Federal Fiscal Court is following earlier case law on partial retirement part-time schemes and long-service awards, which also accumulate pro rata temporis according to their economic cause.

Under accounting legislation the settlement amount necessary under prudent business judgement is to be recognised under section 253(1) sentence 2 of the Commercial Code. The set duration of the leave period of three years means there are hardly any biometric risks in the case in dispute. In tax terms, the provision is to be discounted under section 6(1) no. 3a(e) of the Income Tax Act; an employee turnover deduction is also to be taken into account. 

3. Practical consequences for business practice

Current Federal Fiscal Court case law provides considerable legal certainty for companies with early retirement schemes. It creates the opportunity to recognise accumulating provisions at an early stage over the entire duration of the employment.

In practice it should be checked:

• whether the group of potential entitled beneficiaries expands and
• whether additional years of service are to be included in the provision accumulation.

At the same time the requirements on the documentation are increasing. Commitments under employment law should be formulated clearly and be economically established. Assumptions (particularly on employee turnover and the probability of their being claimed) should be clearly derived and documented.

For tax classification it should be noted that early retirement obligations are neither pension provisions as defined by section 6a of the Income Tax Act or mere provisions for costs. The decisions described clarify the need to evaluate existing schemes for tax in an updated way.

Advisory news in brief

Federal Fiscal Court judgement of 13/11/2025 – IV R 24/23: Partnership risk of a silent partner
The Federal Fiscal Court has again pronounced on the differentiation between typical and atypical silent partnerships. For an atypical silent interest, partnership initiatives and partnership risk must exist. Less of one of the components can be compensated for by more of the others, but none of them may be completely missing. The precondition for necessary partnership risk is holding an interest in the assets. Future services by the silent partner as the only “contribution” he makes do not establish an appropriate risk.

Read more about this in the Federal Fiscal Court Insight from our expert Dr. Martin Weiss

Rejection of appeals on the interest rate of 6 percent for pension provisions (section 6a Income Tax Act)
The supreme tax authorities of the federal states published a uniform general order on 18 March 2026. According to this all pending appeals on the constitutionality of the statutory interest rate of 6 percent can be rejected. Part of the background to this is the decisions made by the Federal Constitutional Court on 28 July 2023 (2 BvL 22/17) and 21 February 2025 (1 BvR 2267/23) and the following Federal Fiscal Court ruling of 2 July 2025 (XI B 19/25). If there are no pending proceedings, the way is open to settle all claims generally.