Pension provision is a term used in accounting and tax law. It concerns obligations of the company pension scheme (pension scheme in tax law, company). With the promise of a company old-age pension, an employer enters into a contractual obligation towards the employee, which he enters into the balance sheet in the form of pension provisions (Internal financing in tax law).
The tax provision should correspond to the present value of the pension obligation in the year in which the insured event occurs (Section 6a EStG). The profit is reduced by the amount of the net allocation to the pension provisions; this has an impact on income tax, corporation tax and the Trade income tax.
The creation and release of pension provisions must be based on actuarial principles. The allocation in a financial year corresponds to the difference between the partial value of the obligation at the end of the financial year and the partial value at the end of the previous financial year.
From an economic point of view, the pension provisions result in a deferral of the income tax to be paid by the company. The expenses that are not cash-effective in the year of the pension commitment result in a profit reduction in the period in which it is made.