On 26 February 2019, the Court of Appeal of Ghent ruled on the income tax treatment of an asymmetric debt-equity swap. The Court decided that both the contributing company and receiving company have to apply the same value.
In the case at hand, a company A had a receivable of 1000 on its subsidiary B, but the market value of the receivable was only 100 (due to financial distress of Company B). Company A contributed the receivable into company B, whereby
- company A recorded the additional shares at 100, hence realising a capital loss on receivable
- company B recorded a capital increase of 1000, hence realising no gain or loss.
The tax authorities disallowed the capital loss of 900 in the hands of company A, arguing that company A should have applied the same valuation as (the capital increase of) company B.
The Court of Appeal decided that:
- the parties can freely choose whether the receivable is contributed at nominal value (1000) or market value (100), but
- both parties have to apply the same value in their books, whereby the contributing company has to record the shares at the same value as the capital increase of the receiving company.
When in a distressed situation, sufficient attention should be paid to the accounting and tax consequences of the transactions you intend to perform, in order not to avoid tax cash out in a short on cash situation.
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