Cancellation of debt – a key element of most restructurings – triggers taxable income. The German Tax authorities had issued an administrative decree (the “Tax Restructuring Decree” – Sanierungserlass), declaring that, upon the satisfaction of certain requirements and conditioned on forfeiture of any loss carry forwards, the cancellation of debt income (“CODI”) would not be taxed. Reliance on the administrative decree was essential for restructurings since the utilization of loss carry forwards in Germany is limited to 60% of the income to the extent the deductible base amount of EUR 1 Mio. is exceeded. Thus, a significant tax liability might otherwise be incurred.
Now, under a recent court ruling, the Federal Fiscal Court’s Grand Senate (the “German FFC” and such ruling, the “FFC Ruling”) has now held that the Tax Restructuring Decree cannot be seen as an interpretation of law and has no basis in applicable law. Waiving a tax in specific cases for equitable reasons may be justifiable for individual cases, but a general decree subsidizing restructurings without evaluating the specifics of the individual case needs a basis in law.