In a recently published decision (case reference: 7 K 3831/10), the local tax court of Düsseldorf ruled on the issue of who is competent to decide on a tax abatement of German trade tax under official guidance published by the Federal Ministry of Finance (BMF) on tax relief for the cancellation of debt.
Under German tax law, the cancellation of a debt of an enterprise from its balance sheet (e.g. by way of a debt waiver or debt-equity swap), in principle, gives rise to taxable income in the hands of the debtor even if the write-off is designed to help the debtor enterprise avoid insolvency (or over-indebtedness). However, according to official guidance issued by the BMF in March 2003, the tax imposed on the cancellation of debt income may be deferred or – following a final assessment – even abated if all of the following requirements are met:
- The enterprise is in need of financial restructuring and insolvency proceedings have not yet been initiated;
- It is still possible to financially restructure the company, so that it can emerge from its financial crisis;
- The measures adopted (e.g. the debt waiver) are appropriate for financially restructuring the enterprise; and
- The creditors waiving their claims intend to financially restructure the enterprise.
All four requirements are deemed to be met if there is an existing restructuring plan. The deferral or abatement of tax due only relates to the income tax on net income, i.e. the tax on income after all available losses have been deducted. Limitations on the offset of losses that apply under normal circumstances – such as the minimum taxation rules – are suspended for this purpose. According to the BMF guidance, the municipalities are competent to grant an abatement or a deferral of trade tax due in a qualifying financial restructuring. This can be burdensome where a company operates from more than one location in Germany because, based on the wording of the guidance, each municipality must agree to the waiver of tax due.
In the case, the plaintiff requested an abatement of income tax and trade tax because the taxable income resulted from a debt waiver in the context of an existing restructuring plan. The tax office granted the abatement for income tax purposes, but said it was not competent to grant an abatement of the trade tax because the trade tax is determined and levied by the municipality on the basis of its own assessment. The municipality also said it was not competent to grant trade tax relief on the grounds that the competent tax office, not the municipality had to determine whether the reasons for the tax relief existed.
A tax abatement by the tax authorities in financial restructuring situations is based on a provision in the General Tax Code, under which the tax authorities can issue a deviating assessment of taxes on equitable grounds. This also applies for the assessment of the trade tax base to the extent instructions for such measures are set out in a general administrative provision of the federal government or of the highest revenue authority of a federal state. The local tax court of Düsseldorf ruled in favor of the plaintiff, concluding that the official guidance issued by the BMF in 2003 constitutes such a general administrative provision of the federal government within the meaning of the General Tax Code, the scope of which was not limited to income tax, but included trade tax.
Therefore, the tax office (and not the municipality) was competent to decide on the waiver of trade tax. As stated by the court, the competence of the tax office was in accordance with the legislative intent. The competence of the tax office is also logical from an administrative perspective, because where a taxpayer operates its business in permanent establishments situated in several municipalities, the competence of several different municipalities could lead to contradictory decisions.
The case is pending before the Federal Tax Court (case reference: I R 24/11), and if that court confirms the decision of the tax court of Düsseldorf, this would significantly reduce the complexity of obtaining tax relief in financial restructuring situations for trade tax and income tax purposes.
If you have any questions, please contact the authors of the article at gtln@deloitte.de or your regular Deloitte contact.
