Vol 14 (2017) - Issue 3

Article preview

Restructuring Order of the German Federal Ministry of Finance Violates German Tax Law: And Now?

Problem
Often the restructuring of a company is only possible if the creditors waive all, or at least some, of their debts. How to deal with the company’s book profit which results from such waivers ('Restructuring Profit') can – especially from a tax perspective – prove to be very problematic. This question, though, is of great importance, since through the potential burden of taxation (amounting to approx. 35 % of the resulting book profit due to corporate income and trade tax) the restructuring could be subsequently endangered or even made impossible from the outset.
Up until 1997, the legal situation was clear under German tax law. Restructuring Profits were tax free in accordance with sec. 3 no. 66 (old version) of the Income Tax Act ('EStG'). However, with the repeal of this provision in 1997 the discussion about the taxability of Restructuring Profits was reignited. In order to maintain a single intended use of this issue by the local tax authorities in practice and to avoid a conflict with the objectives of the Insolvency Code ('InsO'), the Federal Ministry of Finance ('BMF') decided to issue – based on secc. 163, 227 of the Fiscal Code ('AO') – a general administrative instruction addressing how to deal with Restructuring Profits ('Restructuring Order'). Secc. 163, 227 AO provide that the tax authorities may assess taxes at a lower amount or may even waive taxes, where the tax obligation would be inequitable (unbillig) for the tax debtor depending on the circumstances of the individual case. According to the Restructuring Order of the BMF, a tax deferral/exemption for Restructuring Profits is possible if (i) the restructuring needs of the company are clear, (ii) a complete or partial waiver of the debts takes place, (iii) the creditor’s intention to
restructure is apparent and (iv) the deferral/exemption is linked with the restructuring and necessary for its successful implementation.
Until now it has intensely been debated in German case law and legal literature whether the Restructuring Order is admissible or whether the absence of a clear statutory provision and the mere reference of the BMF to secc. 163, 227 AO constitute an inadmissible restructuring privilege. Thus, the Restructuring Order has been regarded to be illegal by the Financial Court ('FG') of Saxony and the FG of Munich. Yet the Restructuring Order has been supported by the FG of Cologne and the FG of Duesseldorf.
On 25 March 2015, the 10th Senate of the Federal Fiscal Court ('BFH') finally took the opportunity to approach the Great Senate of the BFH ('GrS') and asked whether the Restructuring Order is lawful.