Recently, insolvency law was fundamentally amended in terms of reorganization procedures. The tax legislation was subsequently adapted to these new procedures, at the same time changing the content of some important tax rules.
The most important change is that a waiver of debt within the framework of a reorganization agreement becomes less interesting from a tax point of view. You will find out exactly how this works in this article.
With effect as of 1 September 2023, corporate insolvency law was thoroughly reformed. Among other things, this introduced a closed judicial reorganization procedure without publicity and provided large companies with their own procedure that differs from that for SMEs.
However, the provisions of the Income Tax Code (WIB92/CIR92) were not yet adapted to these changes, and therefore the Law of 28 December 2023 containing various tax provisions inserted references to these new procedures in the Income Tax Code. The legislator took this opportunity to substantively change the tax treatment of the results from a reorganization agreement. In principle, this new regime applies retroactively as of 1 September 2023.
1. What are the tax consequences of a reorganization procedure?
Belgian insolvency law has various types of reorganization proceedings (judicial/ extrajudicial, amicable/collective agreement, public/closed), and in each case, these aim at finding an agreement with (part of) the creditors in order to preserve the continuity of a company-debtor. Such reorganization agreements often provide for a (partial) waiver of the debt of the company in difficulty.
1.1 Tax consequences on the part of the creditor
For the creditor, the (partial) waiver of debt means a reduction in the value of its claim against the company in difficulty. Although such depreciation is in principle not deductible (because it is not certain and definitive), the Income Tax Code provides for a temporary exemption of this depreciation during the implementation of the reorganization agreement. Once the agreement is effectively and fully implemented, the exempted depreciation can be converted into a definitively deductible capital loss.
The Law of 28 December 2023 does not change this exemption.
1.2 Tax consequences in respect of the company in difficulty
The (partial) waiver of debt results in an accounting and also taxable gain for the distressed company. Such taxable profits would reduce the chances of a favorable outcome of the reorganization and could potentially even lead to bankruptcy. For this reason, the Income Tax Code provided for an exemption for the exceptional income resulting from a (partial) waiver of debt within the framework of a judicial reorganization procedure.
However, the deductibility on the part of the creditor and the exemption on the part of the debtor created a budgetary asymmetry. To remedy this asymmetry, the aforementioned exemption on the part of the company in difficulty will only be granted temporarily.
From now on, the previously exempted exceptional income will be added to the taxable result of the company in difficulty in the amount of one-fourth each time from the third up to and including the sixth taxable period following that in which the reorganization plan is fully implemented or withdrawn. If the activity of this company is stopped before then, the balance will immediately become taxable.
This change may have a significant impact on the chances of success of reorganization agreements because the company in difficulty will have to bear an additional tax cost (which, admittedly, will only become payable after the agreement is implemented). Moreover, in a subsequent bankruptcy, the (privileged) position of the tax authorities will reduce the likelihood that creditors will still be able to recover something of their claim.
2. Debtor's exemption extended to all reorganization agreements
In addition, the scope of the (from now on temporary) exemption of the exceptional proceeds resulting from a (partial) waiver of debt on behalf of the company in difficulty was also amended.
Under the old regime, this exemption only applied to waivers of debt obtained via a judicial reorganization agreement and therefore not to waivers of debt in the context of a settlement out of court. This tax discrimination is now abolished because the manner in which the agreement is reached is irrelevant. Hence, one will now also be able to benefit from the (temporary) exemption for waivers in an extrajudicial reorganization agreement.
Until recently, reorganization agreements were treated favorably for tax purposes, both on the part of the creditor (deductibility of depreciation) and on the part of the company in difficulty (exemption from exceptional proceeds).
With effect as of 1 September 2023, this has changed as the exemption of the exceptional proceeds resulting from a (partial) cancellation of debt will henceforth be gradually taxed after the implementation of the reorganization agreement. This threatens to limit the chances of success of reorganization agreements. It remains to be seen what impact this new regulation will have in practice.
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