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In a recent decision, the German Federal Fiscal Court has clarified which requirements must be met for restructuring income to be tax-free in accordance with Art. 3a EstG (German Income Tax Act). The focus is particularly on the creditor's intention to restructure and the debt relief’s suitability to serve as a recapitalization measure.
The German Federal Fiscal Court’s (“BFH”) decision X B 94/23 of August 9, 2024 raises new questions regarding the practical implementation of the tax exemption of restructuring income. Our “Corporate Tax” practice group is monitoring developments and is available for further advice.
Restructuring income regularly arises from debt relief granted in order to rescue a company in crisis. The elimination of a liability generally leads to taxable income. Art. 3a EStG provides a legal basis for the tax exemption of restructuring income for company-related restructurings.
A company-related restructuring exists if it can be proven that the following criteria are met at the time of debt relief:
The BFH’s aforementioned decision was based on the following simplified facts:
The plaintiff, the sole shareholder of a limited partnership (KG) that operated several gas stations, had been in financial difficulties since 2003. A restructuring concept had been discussed with a supplier in 2010, but not implemented. It was not until 2014 that the plaintiff and a supplier agreed on a settlement. As part of this settlement, the supplier received a settlement amount of EUR 50,000 and in return waived a claim of EUR 3.7 million.
According to the supplier, the settlement was agreed in order to secure a partial amount of the receivables and save the existing business relationships. The plaintiff deregistered his business in 2020, classified this debt relief as tax-free and applied for the retroactive application of Art. 3a EStG and Art. 7b GewStG (German Trade Tax Act) (Art. 52 (4a) sentence 3 EStG).
The tax office and tax court rejected a tax exemption for the restructuring income in the amount of EUR 3.65 million due to the plaintiff's inability to be restructured and the creditor's lack of intention to restructure. The tax court did not allow an appeal against its decision. The plaintiff lodged an appeal against denial of leave to appeal.
The BFH deemed the appeal against denial of leave to appeal to be unfounded and clarified the following in its decision dated August 9, 2024:
The decision was only (subsequently) designated for official publication on January 9, 2025. This indicates that the BFH wanted to provide guidelines on the interpretation of a debt relief’s suitability to serve as a recapitalization measure and the creditor's intention to restructure outside of appeal proceedings.
The BFH confirms the high requirements for the tax exemption of restructuring income. In particular, the creditor's intention to restructure must be carefully proven. A viable restructuring concept can be important in order to avoid subsequent tax disadvantages.
If you have any questions in connection herewith, please feel free to contact us at any time.
Max Körner, LL.M.
Senior Manager
Certified Tax Advisor
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