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German Debt Restructurings at a Crossroads

Federal Tax Court smashes basis for tax neutral loan waivers – Substantial changes to German restructuring & insolvency landscape likely

In a decision published on 7 February 2017 the German Federal Tax Court held that the Federal Ministry of Finance overstepped its boundaries by issuing the so-called Restructuring Decree. Under the Decree, gains from loan waivers in restructuring situations are (if certain conditions are met and after setting off tax assets) not subject to tax. Although not flawless, the Restructuring Decree worked in practice and was relied upon heavily in almost any German debt restructuring to ensure tax did not jeopardise the proceedings. The decision puts an end to this practice and brings a great deal of uncertainty accompanied by the likely need for more tailor-made restructuring solutions in the future.


Loan waivers by banks and other creditors are typically a cornerstone of the restructuring of a distressed company, be it out of court or in the course of an insolvency plan. Although not cash effective, loan waivers trigger taxable gains under German law. However, since 2003, such gains were effectively excluded from corporate income taxation under the Restructuring Decree. Any tax losses and other tax assets at company level needed to be set off against the restructuring gain.  Despite certain shortfalls (e.g. the need to involve all concerned municipalities for trade tax reasons) and uncertainties (e.g. as to the treatment of restructuring costs and the scope of the tax assets subject to set-off) the Restructuring Decree provided a feasible basis for a successful restructuring and was also relied upon in large cases such as most recently Pfleiderer and IVG.

Court ruling

While doubts had been raised over time as to the legitimacy of the Restructuring Decree – both as to its compliance with the domestic rule of law and as to EU state aid law – the vast majority of courts and authors took the view that the Restructuring Decree was in line with superior law. The Federal Tax Court now decided differently as to the compliance with the domestic rule of law. The court held that there was no legal basis for the Decree but that the Ministry had unjustifiably assumed the role of a law maker. No longer relevant for the outcome of the case at hand, the court did not comment on any EU state aid aspects. It also stressed that the tax authorities could exclude restructuring gains from corporate taxation on a case-by-case basis but that, in making the assessment, no “non-tax reasons” could be invoked such as economic, employment or social policy related lines of reasoning.

Implications and outlook

Restructuring cases for which the tax proceedings have already been completed or for which a binding ruling on the application of the Restructuring Decree had been obtained upfront should remain unaffected. However, the outcome of pending or future debt restructurings is highly uncertain and all stakeholders concerned – including turnaround and tax advisors – may have to rethink the way restructurings are shaped in light of German tax law.

The German tax authorities are currently liaising on a reaction to the court decision. It would be the primary task of the German legislator, however, to fill the void that the Federal Tax Court has left, i.e. at least to create a sound legal basis for tax exemptions of loan waivers similar to the Restructuring Decree. Preferably, the legislator should take the opportunity to not only put restructuring gains on a solid legal basis but to finally shape a comprehensive German restructuring tax regime that also addresses other restructuring measures and that counters aggravating effects from other tax rules (such as the so-called interest barrier).

Whether there is sufficient political will to come to the aid of distressed enterprises at least with a solution similar to the former status quo remains to be seen. With the federal election campaign just around the corner and potential impacts from the EU state aid side this seems far from certain. In the absence of any general tax exemptions for restructuring gains, distressed companies, investors, creditors and their respective advisors will have to address restructuring situations on a case-by-case basis, attempt  to work out individual solutions with the tax authorities on the basis of the peculiarities of the specific case but also develop alternative tailor-made restructuring methods. Even if the Restructuring Decree as the familiar tool for a tax-exempt restructuring is no longer available, there should still be restructuring options left to find a tax optimised solution for most cases.