Restructuring income in special business property and company-related restructuring in a partnership

The tax treatment of restructuring income has been regulated by law since 2017 under Section 3a of the German Income Tax Act (EStG): under certain conditions, it is tax-exempt. Key factors include the company's ability to restructure and the suitability of the debt relief for restructuring; this must be suitable, either alone or in conjunction with other measures, to ensure the continued existence and profitability of the company. However, important details remain controversial. In its decision of August 21, 2025 (case no. IV R 23/23), the German Federal Fiscal Court (BFH) has now commented on, among other things, the application of the regulation to partnerships.

The plaintiff GmbH & Co. KG (KG) operated a guesthouse with a restaurant. One of the limited partners had run the guesthouse as a sole proprietorship until 2005 and then leased it to the KG. For tax purposes, he transferred the previous business assets (including operating loan liabilities) to the special business assets of the KG. There had been ongoing financial difficulties since 2001. In the disputed year 2013, the limited partner made a one-off payment of EUR 350,000 as agreed; in return, the financing bank, which was secured by a land charge, waived the remaining claims. This resulted in a balance sheet income of approximately EUR 348,000 in the special business property. In this respect, the KG claimed a tax-free restructuring profit – initially on grounds of fairness, later by applying for the application of Section 3a EStG.

From a procedural point of view, the Federal Fiscal Court confirmed that the separate determination of the amount of a restructuring gain pursuant to Section 3a (4) sentence 1 EStG constitutes an independent administrative act. This also applies if the restructuring gain accrues in the special business property of a co-entrepreneur. The assessment notice regarding tax-exempt restructuring income is binding as a basic decision for the separate and uniform assessment.

With this decision, the BFH has taken the opportunity to summarize the essential requirements for tax exemption for restructuring income. It clarifies that restructuring income is only tax-exempt if it results from debt relief for the purpose of company-related restructuring. To this end, the need for restructuring and the ability of the company to restructure, the suitability of the debt relief for restructuring purposes and the creditors' intention to restructure must be proven at the time of the debt relief. These requirements must be met by the company itself. Company-related restructuring is only eligible for tax relief in exceptional cases under Section 3a (5) EStG. In the case of a partnership, this means that the individual criteria must be met in relation to the company; it is not sufficient for them to be met in relation to the partner. This also applies if the increase in business assets due to debt forgiveness does not accrue to the joint assets but to the special business property of a partner. In such a case, the criterion of the need for restructuring is therefore only met if the company as such has run into economic difficulties.

The BFH considered the finding by the first-instance tax court (FG) that restructuring was necessary because the KG's financial difficulties were mainly due to the interest burden on the loans to be possible and therefore binding on it. This is because, without the debt relief, the KG itself would have run into financial difficulties, primarily due to the real security on the property and the loss of the limited partner's labor. The BFH also shared the FG's assumption of an intention to restructure, the prerequisites for which are assessed differently. In its current ruling, it does not impose overly strict requirements on the intention to restructure and considers it sufficient that the credit institution's intention to restructure was merely a contributing factor in the debt forgiveness. A creditor's intention to restructure for the benefit of others does not have to be “decisive,” but it must not be completely absent either.

However, the BFH rejected the FG's assumption regarding the suitability of the restructuring and that the debt relief would have eliminated the KG's financial difficulties. The findings made by the FG to date did not sufficiently support the conclusion that the debt relief alone or in conjunction with other measures – including those not exempt from tax – could have ensured the survival of the business. In particular, the FG had not sufficiently taken into account that the business property was in very poor condition, there were obvious maintenance backlogs, and competitors had made significant investments. Thus, there were indications that, in addition to the interest relief, further significant measures would have been necessary to ensure long-term profitability. The FG must now make up for the corresponding assessment of the actual situation at the time of the debt relief in the second legal proceedings.

Notice:

Applications for tax exemption under Section 3a EStG – in particular for restructuring gains in the special business assets of co-entrepreneurs – require reliable findings on the economic situation of the company at the time of debt relief (earning power, investment requirements, competitive situation, necessary measures). An appropriate restructuring plan and documentation of the creditors' reasons for their decision with regard to their restructuring intentions, as well as documentation of the suitability of the debt forgiveness for the restructuring, are relevant to the decision.