There are two traditional ways for German companies to provide for employees’
retirement or ill health, the relief fund and the unfunded pension plan.
The relief fund was established for the help of present and retired employees in need
and is financed by regular contributions by the employer. These are tax
deductible when made, provided certain limits based on the fund assets and
annual outgoings are adhered to. Pension plans are invariably of the defined
benefit variety and are reflected in the financial statements as a provision for
future and current pensions payable. Annual allocations to the provision are tax
deductible as current expense provided the amounts are supported by an
actuarial computation based on prescribed formulae and provided the plan,
itself, meets certain formalities.
Because there is no funding requirement,
granting present employees future pension rights achieves a current tax
deduction without a cash outflow for the employer and without a corresponding
burden on the beneficiaries, who do not tax the income until receipt.