Taxation Of Restructuring Profits In Germany - Tax Administration And Legislator Swiftly React To A Recent Detrimental Decision Of The German Federal Fiscal Court


A recent decision by the German Federal Fiscal Court (BFH) has caused significant concerns in the restructuring community because it will severely complicate future restructurings in Germany or even make them impossible overall. In its decision dated 28 November 2016 (GrS 1/15, published on 8 February 2017) the court held that the so- called restructuring decree (circular on taxation of restructuring profits / Sanierungserlass) dated 27 March 2003 (IV A 6 S 2140 8/03, BStBl. I 2003, 240, amended by circular letter dated 22 December 2009 (IV C 9 S 4140/07/10001-01, BStBl. I 2010, 18) (the "2003 Circular") was unconstitutional because there was no statutory basis for the tax administration to issue such a decree.

The 2003 Circular provides for a tax relief for restructuring profits and has proven to be a helpful instrument in many restructurings involving some form of waiver of indebtedness by creditors. Such cancellation of debt results in a book profit and results in a taxable profit for both corporate income and trade tax purposes. The 2003 Circular was a reaction to the abolishment of Section 3 No. 66 German Income Tax Act (Einkommensteuergesetz) which provided for a general tax relief for such restructuring profits. In essence, the 2003 Circular requires that, as a first step, the restructuring profits be set off against existing tax losses and tax loss carry forwards (without applying any restrictions on the use of loss carry forwards such as the German minimum taxation regime) and then, as a second step, allows for a relief of taxes on the exceeding part of the restructuring profit.

In many financial restructurings to date market participants had relied on the operation of the 2003 Circular, but the German Federal Fiscal Court has, for the time being, set an end to this established practice in the German market.

Reaction of the Tax Administration: The Circular Letter Dated 27 April 2017

On 27 April 2017 the German Ministry of Finance issued a new circular letter (the "2017 Circular") which deals with the application of the 2003 Circular and the tax treatment of restructuring profits in the light of the above-mentioned court decision. The 2017 Circular distinguishes between the following scenarios:

  1. In cases where the waiver has been fully effected on or before 8 February 2017 (the date when the decision of the German Federal Fiscal Court was published) the 2003 Circular shallas one could expectcontinue to apply. If the waiver forms part of an insolvency plan, the waiver shall be deemed as fully effected when the decision of the insolvency court approving the insolvency plan has become final and...

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