When you lay off employees, you usually have to pay them the transition allowance. Can you make a provision for future expected transition compensation? The North Netherlands District Court finds otherwise. However, the entrepreneur in this case does not make sufficient efforts to substantiate the provision.
Criteria for provision
The court tests the provision raised in the entrepreneur's corporate tax return, against the three criteria from the widely known brick ruling:
- does the expenditure originate in facts or circumstances, which occurred in the period prior to the balance sheet date?
- can future expenditure be attributed to that period by the way?
- in respect of the expenditure, is there a reasonable degree of certainty that it will occur?
Reasonable degree of certainty
The court ruled that the entrepreneur had not sufficiently substantiated that there was a reasonable certainty that the expenses would occur. The only argument the entrepreneur puts forward for this is that societal trends show that employees do not spend their entire lives working for the same.
It goes without saying that on the basis of this argument alone, the court was right to deny the formation of the provision. The entrepreneur must substantiate that any future employees would have to leave involuntarily. After all, only then will the transitional allowance be due.
Tariff reduction
In the context of corporate tax, making a provision in 2018 and 2019 is particularly interesting. After all, the rates of this tax will fall. Future costs can obviously be better deducted from profits at the higher current rates.
| Profit | Tariff 2018 | Tariff 2019 | Rate 2020 | Rate 2021 |
| up to €200,000 | 20% | 19% | 16,5% | 15% |
| above €200,000 | 25% | 25% | 22,55% | 20,5% |
This importance will undoubtedly mean that the formation of provisions will receive extra attention from the Tax Administration. It is important to substantiate both the creation and the amount of a provision as well as possible.