Newsletter
TAX TREATMENT OF PENSION CONTRIBUTIONS AND RETIRE-MENT PAYMENTS UNDER THE NEW PENSION SYSTEM
In its interpretation dated 1 July 2005, the Min-istry of Finance set forth the tax implications on cash-out payments under the old pension system, monthly contributions by an employer to bring the retirement fund to an adequate level within five years, and premiums for employees' annuity insurance policy, following the promulgation of the Labor Pension Act (LPA):
If an employer and an employee agree to a cash-out payment under the old pension sys-tem, as explained in Paragraph 3, Article 11 of the LPA, the amount should first be paid from the employees' retirement fund accumulated over previous years. It may be declared as a current-year expenditure only if the retirement fund is insufficient to cover the cash-out payment. This reiterates the provisions of Paragraph 3, Article 33 of the Income Tax Act.
If a profit-seeking enterprise makes monthly contributions, based on actuarial calculations so as to bring its employees' retirement fund under the old pension system up to an ade-quate level within five years after the intro-duction of the new pension system, (Paragraph 1, Article 13 of the LPA) it may then declare as expenditures its contributions to the fund up to 15% of the total wages and salaries paid during the year to those employees with ac-cumulated years of service under the old pen-sion system.
When a profit-seeking enterprise makes monthly contributions under the new LPA pension system, or pays premiums on its em-ployees' behalf for an annuity insurance policy that complies with the provisions of the In-surance Act, it may declare such premium payments as current year's expenditures. As Article 33 of the Income Tax Act has not yet been amended in line with the LPA, this in-terpretation is based on Article 24 of the In-come Tax Act, which provides that the costs of a profit-seeking enterprise shall be de-ducted from its gross revenue when comput-ing its taxable income.