German Supreme Tax Court Endorses Equitable Relief from Taxation of Debt-Equity Swaps

On September 1, 2010, the German Supreme Tax Court (Bundesfinanzhof) published a decision relating to deferrals and waivers by the tax authorities of the corporate income tax that would otherwise be triggered by a waiver of loans, including in the context of a debt-equity swap. Contrary to the view taken by a lower tax court in 2007, the Supreme Tax Court held that the tax regulations permitting such deferrals and waivers are consistent with German statutory law. It can be expected that the decision will significantly facilitate the restructuring of German companies in distress in the future.

The memorandum summarizes the Supreme Tax Court’s holding.