GmbH Crisis: New Solutions for Tax-neutral Restructuring-related Profits


“Restructuring Act 2.0” within reach

There was recently great commotion in the restructuring scene because the Grand Civil Panel of the Federal Court of Finance (BFH) had rejected an important tool for the rescuing of battered companies.

In the view of the BFH, having restructuring-related profits be tax exempt should not be easy, as it has been so far, because the latter is contrary to the principle of legality of administrative action. Although the BFH left open a back door, this did not remove the existing and considerable uncertainties faced by those currently implementing restructuring measures.

As a result, restructuring has become more and more meaningless because it has become so uneconomical. Due to the abolition of the restructuring privilege, some restructuring measures have failed and others have been seriously endangered. For those restructuring, a massive liability problem (due to possible delays in the filing for bankruptcy) has suddenly arisen through the abolition of the restructuring privilege because restructuring could lead to bankruptcy “over night.” The legislature is now likely to remedy this because it has become clear that harm is being done to the economy.

The finance ministers of the federal states have responded and submitted a proposal for the revision of § 3a to 3c of the Income Tax Act. The legislature is now backtracking and opening the doors to sensible restructuring options.

The Bundesrat (Upper House of the German Parliament) took a comprehensive position on this issue on March 10th of this year. It is currently assumed that the revision will be adopted in this legislative period.

If the rumors are true, then it is likely that a scheme for tax relief for restructuring-related profits will be included in the law.

Increases in operating assets or operating revenue due to debt cancellation that are used for restructuring purposes are tax-free, but only upon request. The prerequisite for this is that the company is in actual need of restructuring and is actually capable of restructuring. Furthermore, debt relief must be an appropriate restructuring measure and should be carried out for operational reasons and be done with the intention of helping the creditor. This also applies to business taxes, but only upon requested and on the same conditions.

The utilization of tax exemptions pursuant to § 3a (new) of the Income Tax Act (EStG) means that losses carried forward that are established at the end of the previous assessment period are no longer applicable at the beginning of the assessment period and that negative revenues that occur in the same year as the restructuring can neither be offset with other positive income nor be deducted in other assessment periods.

Practical tip: Continue as before – business as usual

The new regulation should be encouraged so that companies that have undertaken restructuring measures can avoid additional and unnecessary burdens. The law stipulates that this regulation should be applied to the taxation of restructuring-related profits in all open assessments. The restructuring act is thus superseded by the legal regulation. It can be assumed that the Federal Council and the Bundestag will approve the law in this form and that companies will not have to fear losses in the restructuring process.

It remains to be seen whether the EU Commission classifies this tax treatment as an unauthorized aid.

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Tags: #GmbH, #GmbH Crisis, #Insolvency, #liability, #restructuring act

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