On April 16, 2024, State Secretary Van Rij informed the House of Representatives about the Cabinet’s 3rd Tax Policy and Implementation Agenda. Part of the measures that will be announced in the Tax Plan 2025 is the adjustment of the debt waiver income exemption. The purpose of the adjustment is to remove the obstacles created by the concurrence between the current loss compensation system and the debt waiver income exemption.
The debt waiver income exemption
Cancellation or waiver of debts by a creditor usually takes place as part of a (debt) restructuring. To the extent that a waiver is at arm’s length, this in principle results in a taxable gain for the debtor. However, the Dutch corporate income tax has a scheme under which the profit resulting from this waiver is exempted from corporate income tax at the level of the debtor under certain conditions. This is the debt waiver income exemption. An important factor for application of the exemption is that the waiver income is only exempt to the extent that it exceeds the available offsettable losses from previous years and the loss in the year of the waiver.
Concurrence current loss compensation system with debt waiver income exemption
As of 2022, profits in excess of €1 million can only be offset for 50% against losses. This temporized loss offset leads in certain cases to obstacles in achieving restarts of loss-making entities, because these entities – despite the debt waiver income exemption- are faced with corporate income tax on the waiver profit. We illustrate this concurrence using the following example:
| Waiver profit | 10 mio |
| Offsettable losses | -/- 6 mio |
| Debt waiver income exemption | -/- 4 mio |
| Taxable profit | 6 mio |
| Set-off losses | -/- 3,5 mio (1 mio + 50% van 6 mio – 1 mio) |
| Taxable amount | 2,5 mio |
It is clear from the above example that waiver of debt under the current loss compensation system can result in corporate income tax being due on part of the waiver income. This is because the debt waiver income exemption does not apply up to the amount of the available offsetting losses, while the taxable waiver income can then only be offset against these losses to a limited extent. This outcome may create obstacles to reaching an agreement in (debt) restructurings. After all, due to the lack of a concurrence rule between the debt waiver income exemption and the current loss compensation system, creditors will have to gross up their waiver, as a greater amount will have to be remitted due to the debtor being liable to corporate income tax because of the waiver. However, the part equal to the additional waiver is also partially taxed again. In practice, this undesirable concurrence can create obstacles to achieving a restart of the company’s activities.
Although the exact details of the adjustment of debt waiver income exemption are not yet clear, it appears that the undesirable concurrence outlined above between the current loss compensation system and the debt waiver income exemption will be resolved. We will keep an eye on further developments. For more information on this topic, please contact Sjoerd Stokmans or Lex Bekkers.
