Waiver of a claim (Forderungsverzicht): tax consequences explained clearly

Key points in brief

• A waiver of a claim (Forderungsverzicht) almost always results in taxable income for the debtor.
  
• Whether that income remains tax-exempt or is taxed depends on the parties involved (e.g. bank, supplier, shareholder) and on whether there is a genuine restructuring (Sanierung) within the meaning of § 3a EStG.
  
• In a restructuring, a waiver of a claim can be structured as a tax-exempt restructuring gain (Sanierungsertrag) where the need for restructuring, the capacity for restructuring, the suitability of the measure for restructuring and the intention to restructure can be demonstrated.
  
• In the case of shareholder claims in particular, there are additional risks such as a hidden contribution (verdeckte Einlage) and gift tax (Schenkungsteuer).

What are the tax consequences of a waiver of a claim?

A waiver of a claim (Forderungsverzicht) has several tax dimensions on both the debtor side and the creditor side; income taxes (income tax/corporation tax, trade tax) and gift tax (Schenkungsteuer) are particularly important.

• Taxable profit: For the debtor, the release from a liability generally gives rise to income because its business assets (Betriebsvermögen) increase. In principle, such a release results in a fully taxable profit and increases the tax base for income tax/corporation tax and trade tax. In a restructuring, however, § 3a EStG provides an exception: if the release is granted „for the purpose of a business-related restructuring“, the resulting restructuring gain (Sanierungsertrag) can remain tax-exempt, provided that all of the statutory requirements are met. In parallel, § 7b GewStG provides that this restructuring gain is then also left out of account for trade tax purposes.
• Gift tax: In addition, the question always arises as to whether the waiver of the claim can be treated as a gratuitous transfer – for example in the case of waivers by shareholders or relatives – which can additionally trigger gift tax.
• VAT: For VAT purposes, what matters is whether the waiver of the claim is made without consideration or in the context of an exchange of supplies; waivers granted without consideration typically do not trigger any additional VAT, whereas agreements for consideration must be assessed differently.

For practical purposes this means that every waiver of a claim should be examined in advance to establish which types of tax are affected.

What distinguishes partnerships and corporations as debtor or creditor?

The tax consequences of a waiver of a claim depend heavily on who the creditor and the debtor are.

On the debtor side, the following distinctions can be drawn:

• Corporation: A waiver of a claim regularly gives rise to income at the level of the corporation (Kapitalgesellschaft), because a liability ceases to exist and equity increases. That income is in principle subject to corporation tax and trade tax; in a restructuring it can be structured as a tax-exempt restructuring gain under § 3a EStG. Where shareholders waive their claims, it is additionally examined whether the release qualifies as a hidden contribution (verdeckte Einlage) and whether gift tax consequences arise.
• Partnership (e.g. oHG, KG): In the case of partnerships (Personengesellschaften), the waiver of the claim is first recorded as income of the partnership and then allocated to the co-entrepreneurs. The income is therefore relevant for income tax and, where applicable, trade tax purposes at the level of the partners; in restructuring cases it can be recognised as a tax-exempt restructuring gain. A particular feature is that the case law also permits proprietor-related restructurings, in which the waiver is specifically intended to relieve the personally liable partners.

On the creditor side, the consequences can be summarised as follows:

• Corporation: Where a corporation holds the claim as part of its business assets, the waiver generally gives rise to an expense or loss at its level. That loss can only be recognised for tax purposes to the extent that the claim still had value; claims that have already been written down reduce the profit correspondingly less. Where the creditor is a shareholder, it must be examined whether the waiver instead constitutes a contribution or a transfer that is relevant for gift tax purposes. If the shareholder-creditor holds more than 25% in the debtor company, special provisions may prevent the loss from being recognised for tax purposes.
• Partnership (e.g. oHG, KG) or individual: In the case of partnerships and sole traders, the waiver of the claim generally reduces the business assets and can result in a deductible loss. Whether and to what extent the loss is recognised for tax purposes depends on how the claim was previously valued and on the co-entrepreneur status. In the case of individuals holding the claim outside any business assets, the further question arises as to whether the waiver is privately motivated and can therefore have gift tax consequences.

What particular rules apply to a waiver of a claim in the context of a restructuring?

A restructuring gain (referred to in the legislation as „Sanierungsertrag“) is the additional taxable income that arises because creditors release a company in crisis from its debts and its business assets are thereby increased or additional business receipts arise.

Restructuring gains are tax-exempt where all of the requirements for a business-related restructuring under § 3a EStG are met. The legislation requires the taxpayer to demonstrate four points as at the time of the release from the debts:

• Need for restructuring: the business is in a crisis; the decisive factors are liquidity, the amount of the debts and when they fall due, the composition of the assets, the earnings position and the return on capital.
• Capacity for restructuring: the release from the debts must be a viable component of an overall package of measures which makes the continuation of the business appear realistically possible.
• Suitability of the measure for restructuring: the release from the debts must be objectively capable either of enabling the business to be wound up without legacy liabilities (proprietor-related restructuring) or of averting collapse and restoring profitability (business-related restructuring).
• Creditors’ intention to restructure: the creditors act with the aim of restoring the debtor to commercial and financial health; a waiver of a claim granted purely for corporate law reasons, for private reasons or purely in return for consideration is not sufficient.

Where these requirements are met, the corresponding increases in business assets or business receipts are tax-exempt. For restructuring gains arising from the discharge of residual debt and from consumer insolvency proceedings, § 3a Abs. 5 EStG provides for a tax exemption even where there is in fact no business-related restructuring meeting all of the statutory elements.

When is a waiver of a claim subject to gift tax?

A waiver of a claim becomes relevant for gift tax purposes where it is treated as a gratuitous transfer; the risk is particularly high in shareholder relationships and relationships between relatives.

There is a gift in the tax sense where the creditor waives a claim that has value without receiving consideration and thereby deliberately increases the debtor’s assets. Typical examples are a shareholder waiving a fully recoverable loan owed by the company, or a parent waiving a claim against a child’s business. In these cases, alongside income tax it must also be examined whether the value of the claim (reduced, where applicable, by default risks) is to be recognised as an enrichment for gift tax purposes, and which tax classes the parties fall into.

From a structuring perspective, gift tax can be avoided or reduced by clearly documenting the waiver of the claim as a restructuring measure with an economic necessity and an intention to restructure, combined where appropriate with subordination agreements, partial waivers or capital measures. The more clearly the overall picture shows a business-related restructuring involving several parties and a comprehensible restructuring plan, the easier it is to argue that there is no gratuitous transfer