The Impending Bankruptcy Act in light of the new income tax legislation
The amendment to the Income Tax Act finally reflects preventive restructuring also from a tax point of view. Preventive restructuring thus becomes more attractive to creditors by abolishing the "penalty" for debtors' relief.
In another of the articles in the series on the new Act No. 111/2022 Coll. on Solving Impending Bankruptcy (hereinafter referred to as the "Act"), we described for you the relationship between the legislation on preventive restructuring and Act No. 595/2003 Coll. on Income Tax (hereinafter referred to as the "Income Tax Act"), which has not been resolved since the beginning of the effectiveness of the new legislation on impending bankruptcy.
In the case of restructuring under the Insolvency Act from the year 2005, the waived claim represents the tax expense of the creditor and, from the debtor's point of view, debt relief is exempt from income tax. In addition, the creditor may make value adjustments for claims against the debtor in proceedings under the Insolvency Act. In the case of preventive restructuring, tax deductible expenses and value adjustments were not taken into account at all in tax legislation.
As of 1 January 2023, an amendment to the Income Tax Act entered into force, which finally reflects preventive restructuring.
In § 19 par. 2 letters h) of the Income Tax Act, which regulates tax-deductible write-offs of receivables, paragraph 7 has been added, which states that if a preventive restructuring plan is confirmed, the debtor's relief is considered a tax expense of the creditor under restructuring measures.
If the whole claim was not forgiven, but only part of it, only the part waived would be a deductible tax expense for the creditor. On the part of the debtor, the write-off of the liability should continue to be the same as before, ie. The waived liability shall be part of the tax base.
In connection with preventive restructuring proceedings, in § 20 par. 2 letters c) of the Income Tax Act also added the possibility to include in the creditor's tax expenses the provisions it creates for claims against the debtor in preventive restructuring proceedings.
The method of applying tax expenses is similar to claims against debtors under restructuring under the original Insolvency Act. At the same time, only value adjustments for receivables that have been included in taxable income can be a tax expense, up to the amount of their nominal value or the cost paid on assignment, including accessories.
It remains to be hoped that this amendment will make preventive restructuring more attractive not only for debtors, but also for creditors.
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