Debt waivers without a tax cash out (?)


Last week, Belgian Minister of Finance Van Peteghem announced to extend the scope of the existing Belgian tax exemption for debt waivers to non-judicial debt reorganizations.

This is very relevant for debt restructurings involving Belgian debtors, especially as the 2018 Belgian tax reform introduced a cap on the amount of certain tax attributes (such as carried forward tax losses) that can be used to offset taxable profit in a certain year. Indeed, as from 2018 any taxable income exceeding EUR1mio can only be reduced by, for example carried forward tax losses, for 70%. This creates an effective tax rate of 7.5 % (25% * 30%) on any taxable income exceeding EUR 1mio.

For Belgian companies in need of debt restructuring, this often leads to a tax leakage, which comes at a very inconvenient time as they are already facing cash constraints.

Let’s take an example based on a real-life case.

After lengthy discussions with its creditors, Belgian company X receives a debt waiver of EUR10mio (meaning the creditors waive their debt for that amount, in order to provide a new perspective for the company). The EUR10mio will be considered taxable income for company X, as this creates an exceptional -positive- accounting result. In most cases, and prior to the 2018 tax reform, this increased taxable base was netted in full against any available tax losses, so not leading to a tax cash out.

As from 2018 however, there is a corporate income tax leakage due to the basket rule. In our example this is EUR0.675mio (EUR9mio * 30% * 25%), which needs to be paid in cash (either through advance payments or when receiving the tax assessment notice but with an increase for late payment).

This is very burdensome and contra productive especially as a debt waiver, is a non-cash transaction (no cash-inflow for company X, but a reduction of the debt level and future interest expenses).

As a side note, the waiver of debt obtained by company X should not be considered to qualify as an abnormal advantage (against which no tax attributes can offset) as it is clearly inspired by valid economic and financial reasons.

As an important exemption on the prior rule, in case company X enters into a judicial reorganization in Belgium, article 48/1 BITC grants an exemption for this exceptional positive result. Though in practice, many Belgian companies try to avoid such a judicial procedure, as entering into it, is a public fact, often leading to (negative) reactions of stakeholders (such as suppliers).

This issue of negative publicity which inhibits the use of the current tax exemption for debt waivers is exactly what Belgian Minister of Finance Van Peteghem tries to solve. Based on his proposal, a Belgian company would also be able to benefit from the tax exemption in case the debt waiver is part of a non-judicial debt reorganization (outside of court). Of course, there will be some other conditions linked to this measure as well.

Nevertheless, it sounds like a promising solution, for a topic that is on top of mind these days with the negative impact of COVID-19 on so many business.

If this idea pulls through, the realistic available options on the table for distressed Belgian businesses will grow and the catch 22 between a loss of additional cash or negative publicity gets solved.