Provisions for replacement purchases are permitted

Provisions for replacement purchases are financial reserves that companies can set aside to finance future investments in the replacement of plant and machinery. These provisions serve to spread the tax burden in years in which high expenditure is incurred for necessary replacement purchases. Companies can thus set aside profits to reduce tax and are better prepared when expensive replacements are due. If the replacement purchase is not made in the current financial year, a provision for replacement purchases must be recognised in the corresponding amount.

As a rule, replacement purchases must be made within a period of two years. Longer periods are possible in individual cases if taxpayers can prove circumstances for which they are not responsible. Otherwise, the provision must be reversed through profit or loss.