The fiscal consequences of a contractual subordination have been subject of frequent discussion in recent years (see most recently here, in German). For example, German tax authorities often tried to probibit the recognition of liabilities (Passivierungsverbot) in the case of financially weak parties who had declared a subordination. The German Federal Fiscal Court (Bundesfinanzhof, BFH) has now put a bar to this approach:
In its decision from August 2020, the BFH essentially follows the conclusions of the lower financial court (FG) Munich, which had ruled against the tax authorities that in the case of subordination agreements where the debts were also to be serviced from “other free assets”, the debtor would not be freed from his current economic burden. The particular paragraph reads as follows:
“A subordination agreement that provides for the fulfilment of the obligation not only from future profits and revenues but also from “other free assets” does not trigger a prohibition on the recognition of liabilities in the commercial or tax balance sheet even if the debtor is not in a position to create free assets from the perspective of the balance sheet date due to a lack of operating activities and an actual burden on the debtor’s assets is not expected to occur.“
A pleasingly clear statement by the BFH, which follows a synchronisation between civil and tax law in the asssessment of a qualified subordinated debt.
BFH, Urt. v. 19.08.2020 – XI R 32/18 (in German)