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German Public Auditor, Certified Tax Advisor, Partner, Tax & Legal
Certified Tax Advisor, Lawyer, Director, National Office Tax & Legal
The German Federal Fiscal Court (Bundesfinanzhof; BFH) confirmed that conversion-related confusion gains arising when a receivable and a liability merge in the acquiring entity and thus extinguish under civil law, but the receivable had previously been written down, are not covered by the tax exemption for gains from a write-up following a prior partial write-down. The tax administration had taken this position in the Reorganization Tax Decree (there Rz. 06.02). In the literature this is disputed. The BFH confirmed the tax administration with its decision of March 11, 2026 (case no. I R 10/23): such confusion gains give rise to taxable income.
The following constellations are typically affected and this was also essentially the case in the dispute. The parent company - a limited liability company, GmbH - had receivables from deliveries of goods against the subsidiary. These receivables were written down because the subsidiary lacked the ability to pay. Such write-downs of receivables against a subsidiary in which the GmbH holds at least 25% do not reduce the tax base. Due to a sustained loss situation the subsidiary was merged into the parent company. As a result, at the parent company receivable and liability coincided and thereby extinguished under civil law. To the extent of the difference in value between the two items that disappeared - here because the receivable had the lower value - a confusion gain arose.
According to the BFH, such a confusion gain is not tax-exempt. It does not constitute a gain from a write-up after a prior partial write-down. Analogous application of the exemption provision for gains from a write-up is excluded because no recognizable, unintended gap in the regulation exists.
However, the appeal succeeded in part because the BFH took a differentiated view and assumed a partial release (forgiveness) of the already written-off receivables, which correspondingly reduced the taxable confusion gain. In the case the French subsidiary (s.a.r.l. - hereinafter: Sarl) was dissolved without liquidation by way of a transmission universelle du patrimoine (TUP) pursuant to Art. 1844-5 of the French Code Civil and its assets as a whole were transferred to the GmbH. As a consequence of the TUP, only liabilities of the Sarl were transferred to the extent that they were covered in value by assets. Otherwise, the subsidiary’s liabilities (and the corresponding opposite receivables of the GmbH) had previously been extinguished as a result of a (tacit) waiver of claim. Economically, the TUP in the case at issue resulted in the GmbH receiving only a countervalue (= fair value) in the form of the Sarl’s assets, consisting of its bank balances and receivables from third parties, for taking over the Sarl’s liabilities. By consenting to the TUP and not exercising the right to object available to it as a creditor under French law, the parent company effectively agreed that the Sarl would pay it only the amount covered by the asset values and otherwise be released from the liabilities by their transfer to the parent. This constitutes a release (forgiveness) of the receivable.
Notice:
In practice, such confusion gains should be avoided. For example, the partial write-down of the receivable can be omitted from the outset (tax elective right). If the write-down has already been made, besides a release (forgiveness) (see above) it should be examined whether the receivable can be restored to value before the event causing confusion by a shareholder contribution so that a non-taxable write-up occurs. Assignment of the receivable to third parties or takeover of the liability by third parties (other group companies) may also be considered.