Tax treatment in the hands of the creditor
A waiver of intra-group receivables creates a loss accounting-wise and may be tax deductible for the creditor. However, this may not be the case if shareholder motives are the predominant reason for the waiver. Instead, the waiver could be deemed to be a capital contribution into the debtor and will, in principle, not affect the taxable position of the creditor. The forgiveness of debt in favour of a subsidiary that would otherwise be threatened by insolvency or bankruptcy, and thus have a negative impact commercially or financially on the shareholder creditor, should generally not be considered as a ‘shareholder motive’.
In certain circumstances a waiver of intra-group debt that has been written down in a previous tax year by the creditor holding a substantial shareholding in the debtor, may result in taxable income for the creditor. A shareholding is substantial if the creditor has a participation of at least 5% in the debtor for which the participation exemption (for dividends and capital gains) applies.
This income may be deferred by establishing a so-called ‘revaluation reserve’. This reserve should be gradually added to the profit of the creditor, thus becoming subject to corporate income tax at a maximum rate of 25.5%, following an increase of the value of the shareholding in the former debtor. Under certain circumstances the reserve will be immediately taxable, e.g. upon disposition of the shareholding.
If the waiver results in Dutch taxable income for the debtor (see below), the above rules (i.e. regarding shareholder motives and the substantial shareholder rule) may not apply. However, if the waiver results in an exempt profit for the debtor, the creditor must recognise a profit (to the extent of such exempt profit in the hands of the debtor) and may form a ‘revaluation reserve’ to defer taxation. Special provisions apply for intra-group loans to foreign affiliates.
Tax treatment in the hands of the debtor
If a creditor waives an intra-group debt and relinquishes its rights for whatever reasons, the waiver will generally constitute a taxable profit for the debtor subject to corporate income tax at a maximum rate of 25.5%.
There are, however, two main exceptions, in these circumstances.
Firstly, the forgiveness of non-recoverable intra-group debt (which includes recoverable debt, the recovery of which would trigger the insolvency or bankruptcy of the debtor) creates an initially taxable profit that may be offset by available tax losses of the debtor. In certain circumstances, the excess profit not offset by previous tax losses may be exempt. The conditions for this include that the creditor must clearly waive the debt and conclude that given the circumstances any effort to exercise its rights towards debtor would be fruitless.
Secondly, if shareholder motives are the predominant reason for the waiver, such waiver may be deemed a capital contribution into the debtor and should not affect the taxable position of the debtor.