1. New tax debts may arise due to restructuring
- If a trade creditor waives its receivable, the debtor will have to repay input VAT that was deducted in the past. As such, the restructuring may lead to a (new) VAT debt at the level of the debtor.
- On the other hand, the creditor may reclaim the VAT that it has paid on a receivable that is waived. Conversion of a receivable for equity (“debt for equity swap”), however, is generally considered payment of the receivable for VAT purposes. As such, the creditor cannot reclaim VAT, although the value of the acquired equity may in practice be (much) lower than the swapped receivable.
Corporate income tax: taxable waiver income for the debtor
- Under new loss compensation rules for Dutch corporate income tax purposes that will enter into effect on 1 January 2022, only EUR 1,000,000 + 50% of a Dutch tax payer’s taxable income in a certain year can be set-off against tax losses from previous years. Any excess profit (including waiver income) cannot be set-off. Consequently, also the debt-waiver itself could lead to a tax cash-out.
- The cancellation of a debt may lead to taxable waiver income at the level of the debtor. Such waiver income is under certain specific conditions exempt from Dutch corporate income tax by virtue of the Dutch debt-waiver exemption. The most important conditions are: (i) the receivable is not realistically collectable from the creditor’s perspective, and (ii) the creditor expressly waives the receivable. Furthermore, existing tax losses have to be used first before the waiver exemption applies. As such, the debtor may be left without tax losses after the restructuring. Consequently, profits generated after the restructuring would lead to a tax cash-out.
- For debtors that are included in a fiscal unity for Dutch corporate income tax purposes, specific additional conditions apply. Essentially, the Dutch debt waiver exemption does not apply insofar as the debtor incurred stand-alone tax losses that have been “absorbed” by the fiscal unity.
2. Restructuring may lead to a taxable upward revaluation of receivables that have been written down for tax purposes
- A Dutch creditor that has written down a receivable for Dutch corporate tax purposes may face a claw-back provision upon a debt for equity swap, or if the receivable is transferred to a related party. As a result, such Dutch creditor may realize taxable (revaluation) income.
3. Restructuring may lead to a taxable downward revaluation of debts that are transferred in sight of a debt waiver
- Transfer of a Dutch debtor’s payable may trigger taxable waiver income for the debtor at the moment of transfer, if a debt waiver is already in sight at the moment of transfer. This risk occurs if the transfer and the debt waiver are regarded as a coherent set of legal acts.
4. Termination of the fiscal unity may trigger taxable upward revaluations
- If a fiscal unity for Dutch corporate income tax purposes is in place, restructuring may cause such fiscal unity to terminate. There is a risk that assets which have been transferred below fair market value within the fiscal unity within 6 years prior to termination of the fiscal unity, must be revalued to fair market value upon termination. Such upward revaluation would be taxable. Thus, termination of the fiscal unity may lead to additional Dutch corporate income tax due.
- Termination of the fiscal unity may trigger taxable upward revaluations of assets that have been transferred within the fiscal unity below market value.
5. A loss on subsidiary that will not be dissolved due to the restructuring may not be deductible
- Losses on subsidiaries that fall within the scope of the Dutch participation exemption regime are in principle exempt (and thus non-deductible) for Dutch corporate income tax purposes. As an exception, such losses may be deductible by virtue of the “liquidation loss scheme” (liquidatieverliesregeling). However, the liquidation loss scheme can only apply if the subsidiary is dissolved. For shareholders, restructuring may lead to a significant decrease in value of the subsidiary, but if the subsidiary is not dissolved, the liquidation loss scheme does not apply. Such loss may therefore be non-deductible at shareholder level due to the participation exemption.
As set out above, a restructuring under the Dutch Scheme may trigger significant adverse Dutch tax consequences, both on debtor and on creditor side. If adverse tax consequences are overseen while setting up the restructuring plan, this may even result in the court rejecting the plan, e.g. based on the best interest of creditors test. Therefore, the tax aspects of a restructuring under the Dutch Scheme should be reviewed at an early stage.