Update to occupational pension schemes: Can remuneration and occupational pensions be combined?

The Federal Fiscal Court ruled in a judgment on 15 March 2023 (case I R 41/19) on whether paying an occupational pension to a controlling shareholder Managing Director alongside the remuneration for his job as Managing Director constituted a hidden distribution of profit. The Court emphasised firstly that it would keep to its settled case law, i.e. that coexistence of an ongoing salary and occupational pension (a benefit) was generally not in line with the arm’s length principle (which could result in a hidden distribution of profit), but on the other hand, it ruled there was no hidden profit distribution in this specific case.

A prudent Managing Director would either credit the pension benefits against their remuneration or defer the due date of the pension benefits

Hidden distribution of profit is understood to be a reduction in the assets of a corporation that is caused or partly triggered by the corporate relationship and has no connection with an open distribution. A payment is deemed to have been made as a result of the corporate relationship if the corporation grants its shareholder(s) or a related party a pecuniary advantage that it would not have granted to a non-shareholder if it had exercised the due care and diligence of a prudent and conscientious Managing Director. Based on this, the Federal Fiscal Court deduces that a prudent Managing Director would either credit the pension benefits against his salary or postpone the due date of the pension benefit until the beneficiary has finally left their position as Managing Director.

It is still possible to receive both remuneration and pension benefits if together they do not exceed the last salary

In the specific case, the Managing Director’s pay was significantly reduced after he started drawing his pension, i.e. the total amount of the Managing Director’s new salary and his pension together only amounted to approx. 26% of the Managing Director’s salary last received by him (last salary) before drawing the pension benefit. Therefore, as long as the sum of the pension benefit and the Managing Director’s new salary is lower than his last salary, it remains possible for salary and pensions to coexist, the nature of the pension is preserved and there is no hidden profit distribution.

Practical tip

The coexistence of salary and pension is a longstanding issue in company succession. The ruling by the Federal Fiscal Court highlights interesting options for structuring this and incentivises shareholder Managing Directors to continue working for the company after retirement. Not only crediting pension payments against remuneration, but also postponing the due date for paying the pension in return for an increase in future pension benefits in line with the present value can be an option worth considering. The ruling is likely to be relevant not only for continuing to work as a consultant, but also for working as a consultant post-retirement.