For decades, the direct pension commitment (Direktzusage) was the standard instrument when a GmbH wanted to provide for its managing director: the company promises the pension itself and builds a provision for it. Many of these commitments from the eighties and nineties are still on the books today, and there they get in the way: in succession, in a sale, in the conversation with the bank. A sober look at which routes lead out of the direct commitment and where their pitfalls lie.
A classic with a long shadow
The direct commitment is to this day the largest funding vehicle of occupational pensions in Germany: in 2023 it accounted for cover assets of 336.1 billion euros, around 46 per cent of all occupational pension cover assets, with roughly 8.2 million active members and pensioners. This is not a niche problem but the normal case in established mid-sized companies.
Source: German occupational pensions association aba, cover assets statistics, data as of 2023.
The construction principle has a built-in catch: the GmbH is pension provider and debtor at the same time. The obligation grows with every year, it sits on the balance sheet as a pension provision, and it stays there until the last pension is paid or the commitment is transferred. As long as the business runs and the owner stays, that hardly shows. It shows as soon as something is meant to change.
The interest rate scissors: six per cent against two per cent
At the core of the problem is a calculation rule. The tax balance sheet discounts pension provisions at a fixed rate of 6 per cent (Section 6a (3) sentence 3 of the German Income Tax Act, EStG). The commercial balance sheet, by contrast, uses the average market rate of the past ten financial years (Section 253 (2) of the German Commercial Code, HGB), around 2 per cent at the end of 2025 according to Bundesbank statistics.
fixed discount rate, heavy discounting, low reported provision
ten-year average market rate, light discounting, considerably higher reported provision
The lower the rate, the higher the present value of the obligation. The same commitment appears considerably more expensive under commercial law than under tax law. Rate level: Deutsche Bundesbank, discount rates under Section 253 (2) HGB, end of 2025.
These scissors have two practical consequences. First, the commercial balance sheet shows the economic burden more realistically, and this is exactly the figure banks and prospective buyers look at. Second, even a fully built-up provision is not funding: it is a book value, not money. Whether capital is actually set aside, for instance through a reinsurance policy, is a different matter. Many old commitments are only partly reinsured or not at all.
When the commitment concretely gets in the way
In day-to-day operations the direct commitment is above all administrative effort: an annual actuarial report, the balance sheet entry, contributions to the Pensions-Sicherungs-Verein. It becomes critical in three situations. In a company sale, the buyer sets the pension obligation against the purchase price, often with cautious assumptions of their own; some prospective buyers walk away entirely when pension commitments are unresolved. In succession, the next generation takes on an obligation towards the senior that can run for decades and strains the relationship. And in a planned liquidation, the GmbH cannot be closed as long as the obligation exists.
The transfer is not a tax-saving scheme but a tidying-up exercise: it turns an open, decades-long obligation of the GmbH into a quantified building block carried externally. It is paid for with real money, the one-off contribution. The gain is a balance sheet that can be negotiated over again.
Four ways, three of them with pitfalls
Whoever wants to get rid of the direct commitment has, in principle, four options, and two of them are tax minefields.
The commitment stays, reinsurance is built up or topped up. Does not solve the balance sheet issue, but defuses the funding gap.
Payment in return for giving up the claim. Before the retirement age is reached, the case law regularly treats this as a hidden profit distribution for the shareholder-managing director.
The managing director gives up the entitlement. To the extent it has value, there is a hidden contribution: he pays tax on income he never received.
Transfer to external pension providers. The route mapped out by law when the balance sheet is to come free. Details below.
Buy-out and waiver look simple at first glance, but they collide with the same principles that already apply when the commitment is granted: what would not have been offered to an outside managing director does not hold up on the way out either. Both routes belong on the table only with tax advice and in special constellations.
Transferring out in the combination model
The established route splits the commitment into two parts. The part already earned, the past service, is taken over by a Pensionsfonds, a German pension fund vehicle, in return for a one-off contribution. For the managing director this transfer is free of wage tax under the conditions of Section 3 no. 66 EStG. The GmbH releases its pension provision and deducts the one-off contribution as a business expense: immediately up to the amount of the released provision, the excess spread evenly over the following ten financial years (Section 4e (3) EStG).
For the part still to be earned in future, the future service, a reinsured Unterstützungskasse, a German provident fund that acts as an external pension vehicle, takes over the provision. It works with ongoing contributions that stay level or rise, deductible as business expenses (Section 4d (1) no. 1 letter c EStG), and it stays off the balance sheet: no provision, no capitalisation. The Federal Fiscal Court has approved this combination model (judgment of 7.3.2018, I R 89/15).
Why the split? Because the Unterstützungskasse cannot sensibly absorb the past service: a one-off endowment for entitlements already earned does not fit the grid of ongoing contributions, and the business expense deduction fails to that extent. Pensionsfonds for what has been earned, Unterstützungskasse for what is still to come, that is how the strengths of both routes interlock. Insolvency protection through the Pensions-Sicherungs-Verein remains in place with both providers as far as the person provided for falls under the German Occupational Pensions Act; for the controlling shareholder-managing director this role is usually taken over by pledging the reinsurance.
How the implementation runs
A transfer is teamwork in a fixed order. It begins with taking stock: the wording of the commitment, the actuarial values, the existing reinsurance, the planned time horizon of sale or succession. From this, a key points paper emerges with the transfer values and the tax effect, which the company's tax advisor reviews and assesses. Only after this go-ahead do the offer, the resolutions and the transfer follow. Experience shows: the most common mistake is not the wrong model but the late start. Whoever begins the transfer only during a running sale process negotiates under time pressure against their own balance sheet.
Frequently asked questions
Does transferring the pension commitment out trigger tax immediately?
For the managing director usually not: the transfer to a Pensionsfonds is free of wage tax under the conditions of Section 3 no. 66 EStG. At the level of the GmbH, the pension provision is released with effect on profit; in return, the one-off contribution to the Pensionsfonds is deductible as a business expense: immediately up to the amount of the released provision, the excess spread evenly over the following ten financial years (Section 4e (3) EStG). The tax advisor calculates the concrete effect in the individual case.
Can the entire pension commitment move into the Unterstützungskasse?
In practice usually not. For the reinsured Unterstützungskasse, Section 4d (1) no. 1 letter c EStG requires ongoing contributions that stay level or rise. A one-off endowment for entitlements already earned does not fit this grid, and the business expense deduction fails to that extent. That is why the combination model has become established: the part already earned is transferred to a Pensionsfonds, while the Unterstützungskasse carries on the entitlements still to be earned in future. The Federal Fiscal Court has approved this model (judgment of 7.3.2018, I R 89/15).
What does the transfer cost?
The Pensionsfonds calculates the one-off contribution with realistic actuarial assumptions, far more cautiously than the tax balance sheet with its discount rate of 6 per cent. The transfer amount is therefore regularly above the tax balance sheet value of the provision. How large the gap is depends on age, the size of the commitment and the actuarial assumptions, and can only be quantified in a concrete offer. Added to this is the liquidity question: the one-off contribution must be affordable, where applicable in combination with existing reinsurance policies.
What happens to insolvency protection when the commitment is transferred out?
Pensionsfonds and Unterstützungskasse are subject to compulsory insolvency protection with the Pensions-Sicherungs-Verein (PSVaG), so the statutory protection for employees and non-controlling managing directors remains in place. Controlling shareholder-managing directors, by contrast, do not fall under the German Occupational Pensions Act and therefore not under PSVaG protection. For them, pledging the reinsurance usually provides the safeguard. This flank belongs on the table in every transfer concept.
Further reading
- When the tax office overturns the pension commitment: the tests for shareholder-managing directors
- The Unterstützungskasse for shareholder-managing directors
Is there a pension commitment on your balance sheet? In an initial consultation we build the picture: the wording of the commitment, the reinsurance, the time horizon. I prepare the key points of a possible transfer so that your tax advisor can decide on a reviewed basis. No obligation, in Berlin at Gendarmenmarkt or online.
This content is general information and no substitute for individual advice. Tax structuring is carried out in coordination with the client's tax advisor.