Tax treatment in the hands of the creditor
The waiver of an outstanding debt by a creditor shall be treated as an extraordinary loss for accounting purposes. As taxable income for corporate income tax purposes is calculated from the company’s accounting results assessed upon accounting regulations, such loss is normally deductible unless income tax law provides for an adjustment.
Such adjustment would occur if the forgiveness of debt would qualify as a ‘donation’ or ‘gratuity’, which generally are not tax deductible. However, according to the doctrine of the Spanish General Directorate of Taxation, a waiver of debt by the creditor is not always considered as a donation or a gratuity as this requires the subjective factor “animus donandi” (i.e. intention to give) . Therefore, if the waiver of debt by the creditor obeys to an “animus donandi” of said creditor, then the waiver is not considered a tax deductible expense. However, if the creditor has done the utmost to get paid without succeeding, proceeding in the end to waive the debt as a business decision, the referred General Directorate has stated that the amount of waived debt shall be treated as a tax deductible expense.
Additionally, it has to be pointed out that the losses derived from a cancellation of debt under the scope of an insolvency proceeding will be tax deductible provided that certain requirements are met.
Notwithstanding the above, a different rule applies in the event that the creditor participates in the capital of its debtor. There is no stated minimum stake required in this respect, although particular rules may apply in the event that the creditor and debtor are considered related parties for Spanish tax purposes, which includes where there is a direct participation of at least 5% (non-listed companies) or 1% (listed companies). Where the creditor participates in the debtor’s capital, from an accounting perspective the waiver of debt is deemed to be a contribution in kind to the equity of the debtor and not an extraordinary loss. As a consequence, from a tax standpoint, the tax basis of the creditor’s participation in the debtor will increase with the amount of the debt so waived. The same treatment will apply in the event that both creditor and debtor form part of a tax consolidated group under the scope of the special regime in the Corporate Income Tax Law.
Tax treatment in the hands of the debtor
From an accounting standpoint, the waiver of a debt represents extraordinary income for the debtor in the amount of debt and interest cancelled.
From a tax perspective, the foregoing income recognition leads to inclusion in the tax base of the debtor, becoming subject to tax at the corporate income tax rate of 30%.
However, in the event that the creditor holds a participation in the debtor’s capital (without a minimum stake required but with the above mentioned particularities for related parties) or both entities form part of a tax group, no income recognition shall arise for the debtor and the amount of waived debt shall increase the debtor’s equity without triggering any corporate income tax burden.