Tax treatment in the hands of the creditor
The waiver of debt results in the accounting ‘loss’ of a receivable. Such loss, however, is not automatically tax deductible in the hands of the creditor.
The deductibility of such loss may be prohibited, either because it is deemed not to be incurred to retain or increase taxable income (‘general deduction criterion’), or because it is deemed to be an ‘abnormal or benevolent advantage’ granted to the debtor (‘anti-abuse rule’).
The anti-abuse rule provides that such advantages are added to the creditor’s taxable basis and thus ‘offsets’ the accounting loss. Generally, this anti-abuse rule does not apply to debts between Belgian companies. It should therefore only be invoked by the tax authorities where a waiver is in favour of a foreign debtor.
Generally, case law provides that the anti-abuse rule should not apply where the creditor waives its receivable from an affiliated company in financial distress, specifically if such distress could impact on the creditor’s commercial or financial image. However, it may still apply if the financial distress is of such a nature that a waiver of the receivable will clearly not enable the company to cure its solvency. In other words, if the debtor has crossed the line of no return to better fortune, the tax deduction by the creditor may still be countered by the anti-abuse rule.
With respect to the general deductibility criterion, the Belgian Ruling Commission generally links the tax deductibility to the condition that the waiver provides for the reviving of the receivable once the debtor returns to better fortune. There have been rulings, however, where this condition was not required (for instance in case of voluntary liquidation of the debtor where the forgiveness was justified by the fact that a bankruptcy of the company in liquidation could be avoided).
Finally, to the extent that no debt is forgiven, but simply the payment thereof temporarily waived, such waiver results in an accounting ‘reduction in value’ or ‘provision for risks and expenses’, which is generally not tax deductible unless specific conditions are met. If such waiver is obtained pursuant to a composition with creditors approved by a court, such reduction in value will be deductible. This follows from a new law which should enter into force shortly (and no later than 9 August 2009).
Tax treatment in the hands of the debtor
The waiver of debt normally results in an accounting ‘gain’. Such gain constitutes a taxable profit subject to corporate income tax at a rate of 33.99%. However, since the debt is generally forgiven for a company in financial distress, tax losses carried forward may be available to offset such ‘gain’.
There is, however, a similar anti-abuse provision to that set out above which provides that no losses carried-forward may be offset against profits (including any debt forgiveness gain) to the extent that ‘abnormal or benevolent advantages’ have been received from directly or indirectly affiliated companies (resident or non-resident). The case law and Ruling Commission’s view as set out above will apply to whether or not an abnormal or benevolent advantage is present.
Finally, where debt is forgiven within the context of a composition with creditors approved by a court, the ‘gain’ resulting from such forgiveness will be exempt. This is a new measure that was introduced on 31 January 2009. Although it is probably not the intention of the legislature, the new law still allows for the deductibility of the debt in the hands of the debtor if such debt would ‘revive’ pursuant to a recapture clause in the debt waiver agreement because such 'revival' is accounted for as an exceptional cost. The new measure is yet to enter into force by royal decree (but should do so no later than 9 August 2009).