Recent adjustments of tax provisions regarding ‘judicial reorganizations’ offer new opportunities and challenges for distressed companies and their creditors. Most of these adjustments, aligning tax law with the updated insolvency law, entered into force with retroactive effect to 1 September 2023.
The law of 28 December 2023 containing various tax measures has adapted the tax rules for both creditors (Art. 48, par 2 BITC92) and debtors (Art. 48/1 BITC92) in case of “judicial reorganizations”.
A judicial reorganization is a procedure aiming at enabling a company in financial difficulty to restructure itself in order to continue its activities and be able to reimburse its creditors. During the reorganization, in principle the debtor is protected against its creditors and cannot be declared bankrupt. There are 3 types of judicial reorganization:
- The first aims to reach an amicable agreement with one or more creditors on a staggering of payments or the waiver of part of the debt;
- The second focuses on securing a collective agreement with the creditors, wherein obtaining more than 50% of the votes is crucial for validating the reorganization plan;
- The third involves seeking a potential buyer for the company (transfer under judicial authority). This buyer must commit to continuing the business operations, preserving jobs, and repaying all or a portion of the debt.
Before the adjustments, there was some misalignment between the tax rules for creditors and debtors, and some recent changes in the Code of Economic Law were not taken into account. That could lead to situations where creditors could deduct losses on receivables, while debtors were not taxed on profits from waivers of debt. But also to situations where debtors were taxed on profits from waivers of debt because the type of judicial reorganization applied in the case at hand was not yet covered by tax law.
Under the new rules, creditors may benefit from a tax-exemption for impairments on receivables if these are realized in the framework of a Court-approved reorganization plan, amicable agreement or collective agreement. However, ‘judicial decisions in the absence of an amicable agreement’ are explicitly excluded. This is the situation whereby the Court grants the debtor ‘moderate terms’ with regard to creditors with whom no amicable agreement could be reached.
Debtors could already benefit from tax-exemption for profits from waivers of debt received in the framework of a Court-approved reorganization plan or an amicable agreement upon a judicial reorganization. Under the new rules, this has been extended to an amicable agreement outside a judicial reorganization and a collective agreement. Like for creditors, no tax-exemption is possible for debtors in case of ‘moderate terms’.
But even more important is that the tax-exemption in the hands of the debtors becomes a ‘temporary’ exemption, whereby the exempt amount will be gradually included in the debtor’s taxable basis. This will be spread over four taxable periods (i.e. from the third to the sixth taxable period subsequent to the taxable period in which the completion or withdrawal of the amicable agreement or plan took place). In principle, ¼ of the previously exempt amount is included in the taxable basis for each taxable period. In case of earlier cessation of activity, any remaining balance must be included in the taxable basis of that year. This will need to be taken into account in the business plan of the debtors going forward.
Summarizing, in case of a judicial reorganization, it is now even more key to take into account the tax effect of the measures in order to avoid that part of the advantage of the judicial reorganization is ‘nullified’ because of tax leakages.
Thanks goes to Christophe Rapoye, Alice Andries and Brent Celens for their contribution.
