Restructuring a company is often possible only if the creditors waive all, or at least some, of their debts. How to deal with the company's book profit that results from such waivers (restructuring profit) can prove problematic, especially from a tax perspective. However, this question is of great importance, since through the potential tax burden (amounting to approximately 35% of the resulting book profit) the restructuring could be put at risk or even made impossible from the outset.

Until 1997 the legal situation was clear. Restructuring profits were tax free, in accordance with Section 3(66) of the Income Tax Act. However, with the repeal of this provision in 1997, the discussion about the taxability of restructuring profits was reignited. In order to maintain a single intended use of this issue by the local tax authorities and to avoid a conflict with the objectives of the Insolvency Code, the Federal Ministry of Finance decided – based on Sections 163 and 227 of the Fiscal Code – to issue a general administrative instruction addressing how to deal with restructuring profits (the Restructuring Order).(1) Sections 163 and 227 of the Fiscal Code provide that tax authorities may assess taxes at a lower amount or even waive them where the tax obligation is 'inequitable' for the tax debtor, depending on the circumstances of the individual case. According to the ministry's Restructuring Order, a tax deferral or exemption for restructuring profits is possible if:

  • the restructuring needs of the company are clear;
  • a complete or partial waiver of the debts takes place;
  • the creditor's intention to restructure is apparent; and
  • the tax deferral or exemption is linked to the restructuring and necessary for its successful implementation.

Until now it has been intensely debated in case law and legal literature whether the Restructuring Order is admissible, or whether the absence of a clear statutory provision and the ministry's mere reference to Sections 163 and 227 of the Fiscal Code constitute an inadmissible restructuring privilege. Thus, for example, the Restructuring Order has been regarded to be illegal by the Saxony Financial Court and the Munich Financial Court, but has been supported by the Cologne Financial Court and the Dusseldorf Financial Court.

On March 25 2015, the 10th Senate of the Federal Fiscal Court finally took the opportunity to approach the Great Senate of the Federal Fiscal Court and asked whether the Restructuring Order is lawful.


The Great Senate's decision and response (published February 7 2017) was clear: it held that the Restructuring Order is illegal. The conditions for a tax deferral or exemption on the grounds set out within the Restructuring Order do not constitute an 'inequity' in the sense of Sections 163 and 227 of the Fiscal Code.

The crucial term of 'inequity' is, as an indefinite legal term, under complete legal review. According to the Great Senate, the Restructuring Order does not comply with the condition of inequity, as codified in Sections 163 and 227 and defined by the longstanding case law of the Federal Fiscal Court. On the one hand, the Restructuring Order, unlike a classic equity measure, is not tailored to individual cases. It is not tested on a case-by-case basis, but rather provides for standardised regulations. On the other hand, mere economic disadvantages alone (which underline the concept of the Restructuring Order) do not present a reason for a decision on the grounds of inequity. Ultimately, the obvious will of the legislature must be observed, and with the repeal of Section 3(66) of the Income Tax Act it was clearly expressed that restructuring profits should no longer be a tax privilege.

However, following the decision, a tax deferral or exemption for personal reasons – which must be assessed on a case-by-case basis – should still be possible.


This decision is fundamental to the entire restructuring industry. It leads to the restructuring of companies in Germany becoming distinctly more difficult, if not impossible. Since a waiver of claims constitutes a core component of almost every restructuring, the resultant tax burden from now on must be included in the overall restructuring plan and calculation. This also applies to restructurings taking place within insolvency (eg, through an insolvency plan). However, this new legal situation will be at the expense of all creditors and assets and jobs will be put at risk, with the only beneficiary being the Treasury.

Consequently, it is unsurprising that the decision and current legal situation have been heavily criticised by many restructuring practitioners and professionals. Fortunately, politicians have perceived the existing fears of the restructuring industry, and the reform act(2) dealing with the privileged tax treatment of restructuring profits was passed by Parliament on April 24 2017. In essence, the reform act provides that the tax authorities may – even retroactively(3) – assess taxes at a lower amount or may also waive taxes under similar conditions as stipulated in the illegal Restructuring Order. However, there is a significant downside with respect to the reform act – as it is unclear whether a privileged tax treatment of restructuring profits is compatible with EU state aid regulations,(4) the act will come into force only after the EU Commission has confirmed that is has no state aid-related objections against it. This may of course take some time (ie, transit period).

Against this background and in order to provide the restructuring industry with certainty during the transit period, the Federal Ministry of Finance published a new tax decree on April 27 2017 dealing with the tax treatment of restructuring profits during the transit period.(5) According to the new decree, tax deferrals and exemptions that have already been declared by tax authorities before the publication date cannot be reversed by the tax authorities. With respect to restructurings within insolvency (eg, through an insolvency plan), the date of the legal effect of the insolvency plan is decisive.

In ongoing restructurings the legal situation is more complicated. This applies particularly to cases where the tax authority has not yet declared a tax deferral or exemption, but has already granted a so-called 'binding ruling' regarding a potential future tax deferral or exemption to the debtor on the factual basis of an envisaged waiver of claims by the debtor's creditors as specified in the binding ruling. The purpose of such a binding ruling is to secure the legal position of the debtor for the future.

The new decree, which seeks to protect the legitimate interests of affected parties, states that a binding ruling that was granted to a debtor before the publication date of the Great Senate's decision must in principle not be reversed by the tax authorities if the creditors have already waived their claims (as specified in the binding ruling) before the publication date. On the other hand, a binding ruling that was granted to a debtor after the publication date will generally be reversed by the tax authorities, unless the creditors waive their claims (as specified in the binding ruling) before the reversal decision of tax authorities is declared. Finally, in cases where no binding ruling was granted to the debtor before the publication date, a new binding ruling must be granted only to the debtor subject to revocation by the tax authorities. The revocation automatically applies if:

  • the reform act comes into force; or
  • the reform act does not come into force before December 31 2018.

The new decree slightly reduces the existing uncertainty for the transit period, but– because of the revocation option – does not totally remove it. Thus, the only thing that remains certain at the moment is that the whole legal situation is economically unwelcome. It threatens to extensively lessen the attractiveness of Germany as a desirable restructuring destination. Therefore, swift legal action is imperative. Until then, the restructuring practice must partially fall back on alternative concepts, such as, for example, the subordination of claims or a debt hive-up of claims abroad.

For further information on this topic please contact Stefan Sax or Artur M Swierczok at Clifford Chance LLP by telephone (+49 69 7199 01) or email ([email protected] or [email protected]). The Clifford Chance website can be accessed at


(1) Restructuring Order, March 27 2003 – IV A 6 S 2140 8/03, BStBl I 2003, page 240, amended with the Federal Ministry of Finance letter of December 22 2009 – IV C 6 S 2140/07/10001-01, BStBl I 2010, page 18.

(2) See BR-Drucks 59/1/17; BT-Drucks. 18/12128.

(3) For cases that happened in the past.

(4) The Great Senate did not touch on this question, as it was irrelevant to the ruling.

(5) New Decree, April 27 2017 – IV C 6 S 2140/13/10003.