Next to having a huge impact on our personal and family lives, the outbreak and spreading of the coronavirus (COVID-19) is likely to result in a slowdown of economies across the globe. In the coming weeks, we will keep you informed on various tax (re)structuring related topics that may help you in combating the virus and reducing its impact on your companies’ financial health.
Later this week, we will zoom in on the impact of the economic downturn on the new interest limitation rules and some of the shortfalls in the group contribution regime. Our first topic however deals with the old medicine of intragroup debt waivers.
Item #1: Debt waivers – think twice before implementation
As business disruption may continue for a few months, companies’ results are likely to stay south of forecasts made at the start of the year. Some companies may even suffer (tax) losses, or worse, end up with a negative net equity. During the economic crisis of about a decade ago, (conditional) intragroup debt waivers were a common remedy to alleviate the financial distress of less performing group entities. Such waivers resulted in a tax deductible expense in the hands of the creditor company waiving its debt and taxable income in the hands of the debtor company. However, as the latter mostly had current year tax losses or carried forward tax losses available, the taxable income of the debtor company could be sheltered with these tax losses. The technique hence not only resulted in an equity cure at debtor’s level, but also in a net cash tax saving at consolidated level.
Pursuant to the corporate income tax reform of December 2017, a so-called ‘basket rule’ was introduced. This new rule only allows for a partial compensation of carried forward tax losses (and other selected tax attributes), possibly triggering a minimum tax cash tax upon using a company’s tax attributes. Hence, one should be mindful of the fact that what worked fine until some years ago, may no longer be (tax) efficient in today’s reality and even result in additional cash drain. Alternatives (such as a combination of waiver of debt and debt-equity swap) may still be available, but do require a more individualised approach. Feel free to reach out to our subject matter experts for a tailored view on your situation.