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Germany: German rules for restructuring relief

23 March 2017

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Linn Braun
Alexander Linn Thorsten Braun

The German Federal Tax Court has ruled that the existing administrative practice on the exemption of certain tax technical gains, triggered in restructurings of companies facing difficulties, lacks a legal basis and cannot be applied any longer (case: GrS 1/15). Shortly after the judgment, however, the German legislator introduced draft provisions that would reinstate the past administrative practice.

Under administrative guidance issued on March 27 2003 on restructuring relief (Sanierungserlass), certain tax technical gains triggered by debt waivers and other debt restructurings as part of an overall concept to prevent insolvency of a company in difficulty and to restore its competitiveness (covered gains) were subject to a special tax treatment. The covered gains could be offset in full against existing tax loss carry forwards without application of minimum taxation rules and any tax on exceeding covered gains could be deferred and potentially waived. In proceedings initiated by a taxpayer, which realised similar gains but where tax authorities denied the application of the restructuring relief, the German Federal Fiscal Court ruled that there is no need to analyse whether the requirements set forth in the administrative guidance were met, as this guidance is void because it lacks a legal basis.

In a reaction to this judgment, the German Upper House of Parliament has proposed introducing provisions in the German Income Tax Act and Trade Tax Act, which would effectively reinstate the past practice. Under the proposed rules, a company can elect to exempt gains from debt restructuring measures, which are part of a restructuring of a company in difficulty and have the purpose to restore competitiveness of such a company. If a company applies for such a tax exemption, the company would lose all tax carry forwards and current year losses. It is proposed that the rules will apply to all open cases. If enacted, there would not be a period where no restructuring relief was available to companies undergoing a qualified debt restructuring.

As a reaction to discussions in literature over whether the administrative practice (if applicable) is in line with EU state aid rules, the legislative proposal would include a provision that defers the enactment of the new rules until the European Commission approves the measure. By notifying the Commission of the measure, an approval (no-aid decision or positive decision under Article 4, paragraph 2 or 3 of Council Regulation (EU) 2015/1589), will provide certainty for any company making use of the new rules. This intention to notify the measure shows the increased importance of state aid rules in the area of taxation, but also shows the increased awareness of legislators of these rules, which is a welcome step towards more certainty.

Alexander Linn ( and Thorsten Braun (
Tel: +49 89 29036 8558 and +49 69 75695 6444

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