(Intragroup) debt waiver
The waiver of debt results in a tax deductible expense for the Belgian creditor company waiving its receivable, and in a taxable income (i.e. a strengthening of the equity) for the Belgian debtor company. The Belgian debtor can set off tax deductions (e.g. tax losses carried forward) with the extraordinary profit that is realised, but taking into account the so-called basket rule of 1 Mio EUR. If the total profit of the debtor is less than 1 Mio EUR, the basket-rule does not apply, meaning that the taxable income can in principle be fully compensated with the tax deductions available. If however the basket-rule does apply, only partial compensation of the tax attributes is allowed, leading to an effective tax cash out for the debtor company.
Furthermore, the Belgian tax authorities consider in principle, depending on the situation, an intragroup waiver of debt irrespective the residency of the grantor as an abnormal or benevolent advantage received for the debtor company with the result that no tax deductions can be set off against the abnormal benefit. This results in the abnormal or benevolent advantage being immediately taxed in the hands of the debtor company irrespective of the tax deductions available, leading to an effective tax cash out for the debtor company.
If the waiver of the debt takes place in the context of the law on the continuity of companies the resulting extraordinary profit is tax exempt; remaining the tax losses intact.
For the sake of completeness, we inform you that the tax authorities have confirmed in a circular letter of 23 March 2020 that the Corona crisis is regarded as an exceptional circumstance justifying the write-down on trade receivables on (group) entities having a backlog in payments following specific health measures taken by the Belgian government. This means that some flexibility will be applied considering the doubtful character of the write-downs as tax free depreciations. However, the circular seems to conclude that write-downs on receivables incorporated in bonds or similar securities are excluded from the benefit of the tax exemption.
Considering the possible tax cash out effects regarding a debt waiver for the debtor company, the following two alternatives or a combination thereof might be considered. However, an upfront tailor-made advice remains recommendable. The specific situation of the debtor company needs to be taken into account, as well as the current applicable tax legislation and the positions taken by the Belgian Accounting Standards Committee, Belgian tax authorities, Belgian Courts and the Ruling Committee.
Conditional (intragroup) debt waiver
Under specific conditions the Ruling committee does not consider a waiver of debt under the condition of return to a better status, to be an abnormal or benevolent advantage received for the debtor company. Consequently, the conditional waiver of debt results in a tax deductible expense for the Belgian creditor company waiving its debt and in a taxable income for the debtor company against which tax deductions (e.g. tax losses carried forward, taking into account the 1 Mio EUR treshold) can be set off.
Under a conditional debt waiver, the debt will revive once the solvency of the debtor company again recovers and the expense resulting from the revival of the waived debt will be tax deductible for the debtor company.
(Intragroup) debt equity swap
A debt equity swap might be an alternative to avoid that an abnormal or benevolent advantage for the debtor company can be retained in case of a waiver.
A debt equity swap is a contribution in kind of the receivable towards the debtor company whereby the receivable is swapped into (additional) shares in the debtor company at the level of the creditor company.
In order to avoid discussion with the Belgian tax authorities regarding the at arm’s length principle between related parties, implying that the conditions (e.g. the number of new shares issued in return for the contribution) should be in line with the conditions applicable in an open market situation between unrelated parties in similar cases, a valuation of the debtor company as well as of the receivable is recommended.
Furthermore, please note that a debt equity swap raises several questions with respect to the valuation of the contribution: Should the receivable be contributed at nominal value or (under these circumstances probably) at the (lower) fair market value? Should the debt equity swap occur symmetric for the debtor and creditor company or is a asymmetric debt equity swap acceptable? Anyhow, the contribution in kind must be supported by a report of an auditor and the Board of Directors and can only be decided before a Belgian notary.
The valuation of the contribution has different consequences for both the debtor and creditor company: The debt equity swap at nominal value allows the debtor company to restore the equity and avoids that an abnormal or benevolent advantage can be retained in case of a waiver. A conversion at (lower) fair market value leads to taxable income for the debtor company that in principle can be fully compensated with (sufficiently) available tax attributes provided that the threshold of 1 Mio EUR is not exceeded. For the Belgian creditor company a debt equity swap at nominal value leads to a non-deductible impairment on shares it receives in return for the contribution of the receivable at nominal value, as opposed to the tax deductible loss on the receivable upon a contribution at fair market value.
For questions, you can contact your regular BDO contact person or send an e-mail to [email protected].