Changes to tax treatment of debt waivers in the framework of a reorganisation
On 29 December 2023, a law was published dealing with, amongst others, the tax aspects of reorganisations (the “Law”). The publication of the Law follows the implementation of the EU Directive 2019/1023 by the law of 7 June 2023, introducing the new reorganisation procedures contained in this Directive in Belgian law (the “Reorganisation Law”).
Important to note is that the Law also impacts the tax treatment of the reorganisation forms existing under Belgian law prior to the adoption of the Reorganisation Law, by providing deferred taxation of any debt waiver occurring in the framework of a reorganisation in the hands of a debtor company.
1. Old regime
Companies in financial distress may opt for a reorganisation leading to a debt restructuring which can take several forms, including a total or partial debt waiver.
A debt waiver generates an accounting cost for the creditor company (i.e., a reduction in the value of its receivable) and an accounting income for the debtor company (i.e., a reduction of its debt).
The corporate income tax treatment of such a debt waiver used to be as follows:
- for the creditor, Art. 48, paragraph 2, of the Belgian Income Tax Code (“ITC”) provided for an exemption of impairments and provisions for doubtful receivables if and to the extent they resulted from a judicial reorganisation or amicable settlement homologated or recognised by a Court (including non-judicial amicable settlements pursuant to Art. XX.38 of the Code of Economic Law). Definitive losses on such receivables are generally tax deductible subject to the normal conditions; and
- for the debtor, Art. 48/1 of the ITC provided for an exemption of profits arising from debt waivers following the homologation or recognition of the reorganisation by a Court (Book XX, Title V, of the Code of Economic Law, i.e. judicial reorganisations). No exemption was provided for other forms of reorganisations, such as non-judicial amicable settlements (pursuant to Art. XX.38 of the Code of Economic Law).
As a result, the corporate income tax treatment differed depending on the reorganisation procedure applied: (i) for judicial reorganisations and judicial amicable settlements which were homologated or recognised by a Court, Belgian tax law in principle provided for an exemption for both the creditor and the debtor, while (ii) in the case of non-judicial reorganisations (such as amicable settlement pursuant to Art. XX.38 of the Code of Economic Law), the exemption only applied to the creditor, at the exclusion of the debtor. In the latter case, this meant that the non-judicial reorganisation comes with a cost for the debtor (i.e., the corporate income tax due on the debt waiver).
2. New regime: alignment of tax treatment between reorganisation types and deferred taxation of gains from debt waiver for the debtor
The Law makes the following changes to the corporate income tax treatment applicable to debt waivers:
- for the creditor, the scope of the exemption for impairments and provisions for doubtful receivables is extended to cover the new reorganisations introduced by the Reorganisation Law. Definitive losses in loans remain tax deductible subject to the general rules; and
- for the debtor, the scope of the exemption of accounting profits from debt waivers is extended to all forms of reorganisations included in the Code on Economic Law, including those introduced by the Reorganisation Law and non-judicial amicable settlements (pursuant to Art. XX.38 of the Code of Economic Law).
However, the exemption provided now becomes temporary, rather than permanent under the old regime. More specifically, the exemption will only apply during the two taxable years following the taxable year of the full execution of the reorganisation plan or amicable settlement. From the third taxable year onwards, 25% of the previously exempt amounts will be added to the taxable base of the debtor, up to the taxable period during which the cessation of activity takes place (with a maximum of four taxable periods). In other words, the exempt amounts will become taxable for at least 25% per year between the 3e and 6e taxable periods following the taxable period of the full execution of the reorganisation plan or amicable settlement.
This is an important change which may have a significant adverse effect on the cash position of debtors which obtained a debt waiver, irrespective of the procedure of the reorganisation (judicial reorganisation or amicable settlement).
The legislator’s intention – which is clear from the parliamentary works – was to remedy the pre-existing “asymmetry”: the fact that the same amount could be “deducted” on the one hand and exempt on the other hand. The legislator wanted to put an end to this asymmetry by taxing the debtor company but deferring this taxation and spreading over several years, in order to allow the debtor company to realise a turnaround before being taxed.
3. Entry into force
As regards the broadening and alignment of the scope of application to the various types of reorganisation procedures, the Law entered into force on 1 September 2023.
As regards the deferred taxation of debt waivers, the Law entered into force on 8 January 2024. It applies to amicable settlements established and reorganisation plans homologated as from this date.
