German Parliament introduces a new Tax Exemption Law for Restructuring Gains

On April 27, 2017, the German Federal Government has passed legislation enacting new rules on the taxation of restructuring gains. The reason being, the existing practice of having a tax liability arising out of restructuring gains to be deferred and eventually waived violates fundamental principles of German law.


A “restructuring gain” occurs when a creditor partially or completely waives off debt to a troubled business entity to restructure itself. In Germany, restructuring benefits ceased to exist in 1998. However, on March 27, 2003, the Federal Ministry of Finance (FMF) issued a ‘Restructuring Decree’ (Sanierungserlass) that empowered tax authorities with a specific tax exemption provision for business entities in financial distress. The overall purpose of debt waivers and other debt restructuring is to prevent insolvency of companies and restore their competitiveness.

Court Verdict

The Federal Tax Court (BFH) in its earlier verdict on November 28, 2016, disapproved the “Restructuring Decree” and referred to it as a violation of the constitutional principle of legality of administrative actions.

Aftermath of the Judgement

The court verdict created uncertainty among tax authorities tackling business restructurings. To dispel its effects, the German government decided to roll out the revised laws. They came up with Section 3a in the Income Tax Act (ITA) to provide relief from income and corporate taxes. Additionally, Section 7b TTA (Trade Tax Act) has addressed restructuring gains taxes. These new acts will provide financially troubled business entities the much-needed legal protection from taxes. The new law specifies few rules for exemption (either partial or full), and companies in need of restructuring gains are required to prove the following:

  • Company is in need of rehabilitation
  • Company has the potential to rehabilitate and restore competitiveness
  • Tax exemption is the right step for the company’s revival
  • Furnish evidence that tax exemption is for business reasons and to revive the business entity

Companies seeking restructuring gains, however, have to give up all the tax loss carry forwards, and current year losses in the restructuring year as well as any losses occurring in the year following the tax exemption request.

Application Period

The new rule will apply to all cases where exemption occurred on or after February 8, 2017. For the cases where claims of debt relief occurred before February 8, 2017, the restructuring decree of March 27, 2003, will apply.

The Road Ahead

The legislation subsequently goes to the German State Council (Bundesrat) on June 2, 2017, for approval.  However, EU State aid has the final say on the implementation of these new rules.

Currently, it is anticipated that for the time being the tax waivers from restructuring gains may only be granted in exceptional cases, or else it may lead to substantive or personal unfairness on the chosen companies.

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