Taxes in turnaround – EU-Commission “supports” § 3a EStG (“Sanierungserlass”)

According to yet unconfirmed press releases, the EU Commission has no objection to the new legislation of the so-called “Sanierungserlass“, now contained in § 3a German Income Tax Code (“Einkommenssteuergesetz” “EStG“), which was declared unconstitutional by the German Federal Tax Court (“Bundesfinanzhof“, “BFH“) last year (see here). Since the ECJ recently also surprisingly declared the so-called “Sanierungsklausel” of § 8c 1a KStG as being legitimate (see here), taxation in business turnarounds will most likely be more relaxed – just in time for the beginning of the next economic crisis (see here).

The new provision of § 3a EStG provides for a (more or less) automatic waiver of so-called turnaround profits (“Sanierungsgewinne“). In a typical corporate turnaround, the creditors often agree to waive all or parts of their claims (“haircut”). The ensuing (not liquidity-effective) book gain incurred through this waiver normally leads to a (liquidity-effective) tax claim, which is based on the tax rate of the respective legal entity. With the new rule in place, such turnaround profits will remain untaxed in the future. Together with the just upheld provision of the Sanierungsklausel” of § 8c 1a KStG, which allows to get new shareholders aboard in a turnaround scenario without losing the right to use the accumulated loss carry-forward of the company, the “tool-kit” for a successful turnaround is (again) complete, at least tax-wise.

According to the German Finance-Magazin, however, a downside remains: While the legislature had “drafted” the legal version of the Sanierungserlass in the new § 3a EStG in a way that with the approval of the EU Commission the law would automatically take effect, the EU Commission in a “comfort letter” to the German Ministry of Finance seemingly only “encourages”the legislature to create a new law. If this message is correct, the legislator would be required to change his own law again. However, with a view to the speed with which the German Parliament reacted to the BFH decision at the time (less than two months!), The “hang-up” is likely to last only a short time now.

Finance-Magazin: „Brüssel reanimiert Sanierungserlass“

Leave a Comment