date | theme

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27. September 2019 | Sales of GmbH by change of form in GmbH & Co. KG: 50% tax savings!

November 3, 2020 | Dr. Oetker buys the startup bottlenpost SE for EUR 1 billion.

18. June 2021 | Business Divestment: Share-Deal not taxable – also consider adverse legal consequences!

13. June 2022 | Life pension instead of the purchase price for a company: meaningful design? (this contribution)

Annuities are recurring emoluments consisting of regular and uniform benefits in money or other justifiable things and payable until the end of the life of the vendor (§ 759 BGB). For example, you can arrange these instead of a purchase price as part of a company sale. But then the question arises as to how such agreements should be assessed under tax law. Our contribution explains the tax treatment of the pension at the buyer of the company.

Liebrenten are regulated in § 759 BGB. Accordingly, annuities are recurring emoluments consisting of regular and uniform benefits in money or other defensible things and payable until the end of the life of the vendor. Nevertheless, the contracting parties usually set a minimum term and a maximum term for the payment, otherwise the annuity depends solely on the death of the pensioner. But then the buyer has to pay too much for an above-average lifetime, while he has to pay a lower price for an early death. For this reason, favourite annuities, as envisaged by BGB, constitute a risk business. However, this usually does not correspond to the interests of the parties. Therefore, an exact maximum term and minimum term of the annuity is necessary, which must be negotiated by the parties and also written down in the company purchase contract.

The annuity can be agreed instead of a cheque price. Then the acquirer of a company pays the seller an annuity. For him, the body pension has the advantage that he does not suddenly have to raise a particularly large sum, but can distribute it over years. These individual amounts can then be financed from the company’s income. In addition, there is no interest. On the other hand, the seller of the company receives financial protection until the end of his life and is not forced to invest the capital gains profitably in order not to be exposed to far-reaching tax burdens. Then the question arises, however, with which values the buyer must set the acquired assets and how the current pension payments are to be taken into account.

Professional Advice on Business Purchasing and Sales?

2.1.1. Accounting for the preferential pension of a person entitled to a pension

The acquirer can determine his profit by accounting. In that case, the obligation to pay an annuity is an operating liability which is liable for the present value of the pension to be determined in accordance with §§ 12 et seq. This includes a multiple of the annual value of the services. The latter shall be the annual amount of pension payments expected to occur in that year. This means that if the seller receives 3,000 euros monthly, the annual value (3,000 euros x 12 months =) is 36,000 euros. The duplicator, on the other hand, is determined from the death table of the Federal Statistical Office. The death table published on the first of January of the year of death is decisive. The exact calculation of the duplicator is complicated. However, the BMF always publishes the resulting replicators for the net present value in the annual amount of one euro according to the age and sex of the beneficiaries in the Federal Tax Gazette (for the valuation dates from 01.o1.2021: 28. 10.20, IV C 7 – S 3104/19/10001 :005) .

2.1.2. Accounting for an annuity of several persons entitled to a pension

If the annuity is linked to the life of several persons, for example to the life of the spouses, the determination of the present pension value is necessary for each person entitled to a pension. Then, within the framework of the passivation according to § 14 paragraph 3 BewG, it is decisive when the body pension expires. Therefore, the higher pension present value is decisive for passivation if the annuity is to end with the death of the last dying person. Consequently, the present value of the pension is to be recognised in relation to the youngest person. Differently, however, if the annuity is to end with the death of the first dying person. Then the pension present value of the older person is crucial.

2.1.3. Minimum duration or maximum duration

If the annuity agreement sets a minimum term or a maximum term, the original pension present value cannot be readily recognised on the balance sheet. Accordingly, a pension present value must also be determined on the basis of the minimum term and maximum term.

If the present value of the minimum term is higher than the present value of the original term, the present value of the minimum term shall be used. However, if that amount is lower, the original higher present value of the pension shall be used. If, on the other hand, the present value of the maximum term is lower than the present value of the original term, the present value shall be the maximum purchase time. On the other hand, the original pension present value applies if the maximum pension present value is higher. Finally, the amount corresponding to this ratio is to be passivated.

If the present value of the pension was determined and passivated at the beginning of the pension agreement, it shall be recalculated at the following balance sheet dates. In the calculation, the pension amount and life expectancy should be included again. Due to the progress of age, the expected life expectancy decreases and the pension value decreases. If, on the other hand, the present value does not depend on the lifetime, but on the minimum term or maximum term, the present value is also reduced accordingly. Because with last year, the remaining terms are also lower.

Therefore, the liability to be passivated decreases from year to year. As a result, the difference between the old value and the new value shall be triggered each year. The amount to be triggered in this way shall be recognised as extraordinary income on the balance sheet date. Although the monthly pension payments are to be recognised in full as operating expenses. However, since the amount to be triggered is to be used to increase profits, the operating expenses alone in excess of the extraordinary amount from the pension payments reduce the profit.

The tangible and intangible assets acquired by the company purchase must be activated. The previously determined annuity represents the sum of all costs. Therefore, in the opening balance sheet, all assets transferred are to be capitalised in the sum with an amount corresponding to the present value of the pension. The acquisition costs of the respective individual assets are to be determined in the ratio of the partial values to the present pension value. If the present value exceeds the sum of all individual assets, the remaining amount shall be capitalised as an enterprise value.

If the obligation to pay the annuity ceases, the still passivated annuity value shall be dissolved in a profit-enhancing manner. Therefore, resolution amount represents a current profit. This is a purely operational incident that succumbs to the normal tax rate and is not taxed at a reduced rate according to § 34 EStG.

The valuation is judged differently when the buyer determines the profit by revenue-surplus calculation. There are neither activations nor passivations. However, this does not mean that the pension payments made are immediately and fully deductible following a company purchase. Only an included interest share can be claimed immediately as operating expense. Therefore, the acquirer must first determine the present value of the pension in the context of the surplus income calculation by means of the above calculation. On the basis of this, he must then allocate the acquisition costs of the acquired tangible and intangible assets.

The acquired fixed assets have a cost equal to the present value of the annuity covered by this part. In the case of usable assets, they may be written off or deducted immediately as operating expenses. On the other hand, non-utilizable assets of the fixed assets can only be written off when the respective assets leave the operating assets. Therefore, the general principles of depreciation of fixed assets apply.

If, on the other hand, assets of working capital are acquired, the annual share of capital of the annuity attributable thereto is deductible in full as operating expenses. This is the part of the pension that arises from the fact that on the next balance sheet date the pension present value is lower. Example: The pension present value in the year of acquisition is 415,152 (3,000 euros pension x 12 months x duplicator 11.532). On the following balance sheet date, the pension present value is only 404,892 (3,000 euros x 12 months1 x 11,247). The pension present value has therefore been reduced by 10,260 euros. The part of it that falls on working capital can be deducted as operating expense.

The abolition of an annuity by death results in an operating income equal to the annuity of the present pension value. However, this only applies to the extent that the pension present value is attributable to acquired fixed assets. Because in this respect, the acquirer is still entitled to depreciation volume. The present value of current assets, on the other hand, must not be used to increase profits.

For simplification, R 4.5 para. 4 S. 4 EStR it is only to determine the present value of the pension and to allocate the cost of the acquired assets on the basis of it. Then the individual pension payments are neutral and in full against the pension present value. Only as soon as the sum of the pension payments exceeds the initial pension present value, all payments in excess are to be deducted in full as operating expense and reduce the current profit.

With regard to personal circumstances, it can often make sense to agree on an annuity as part of a company purchase. The approach, on the other hand, is more complicated than when agreeing on a purchase price. Nevertheless, the simplification can be used when determining the profit by income surplus calculation. We are happy to advise you on this.