The German Federal Court of Justice (BFH) ruled in its April 21, 2026, judgment (IX R 34/24) that a debtor cannot derecognize a liability simply by agreeing not to assert the claim during insolvency proceedings. According to the BFH, such an agreement constitutes a standstill rather than a waiver, meaning the economic burden of the debt remains on the balance sheet for tax purposes. This ruling clarifies that only the actual extinguishment of an obligation justifies removing a liability, regardless of a company’s financial distress.
Why does a standstill agreement fail to trigger tax-exempt income?
The BFH determined that a standstill agreement—where a creditor promises not to pursue a claim during insolvency—does not erase the underlying legal obligation. According to the court, an economic burden persists as long as there is no “probability bordering on certainty” that the claim will never be asserted. Because the agreement functions similarly to a deferral or Stundung, the liability remains a valid entry on the balance sheet. This prevents companies from generating artificial, tax-exempt income by derecognizing debts that have not been legally extinguished.
The BFH ruling aligns with the July 2021 circular from the Frankfurt Regional Tax Office (OFD Frankfurt S 2743 A-12-St 523). Both sources confirm that even a company’s total illiquidity does not automatically allow for the removal of liabilities from its tax balance sheet.
How does this affect subordinated debt and restructurings?
The BFH affirmed that subordinated debt (Rangrücktritte) does not automatically trigger a prohibition on recognizing a liability under Sec. 5 para. 2a of the German Income Tax Act (EStG). If the debtor retains the possibility of satisfying the debt from assets outside the insolvency estate (insolvenzfreies Vermögen), the liability must remain on the books. This principle applies beyond traditional insolvency to modern frameworks like the German Corporate Stabilisation and Restructuring Act (StaRUG) and complex intra-group restructurings.
What are the consequences for creditors?
The tax treatment of a liability is not a two-way street; the BFH notes that no correspondence principle applies to the creditor. While a debtor must keep the liability on their balance sheet, the creditor may be required to write down the claim’s value due to the debtor’s financial distress. Under the prudence principle, creditors can often opt for a write-down to the lower fair market value (Teilwertabschreibung) in their own tax accounts if the impairment is expected to be permanent.
When drafting settlement agreements, distinguish clearly between a temporary standstill and a formal waiver of claims. A waiver is the only reliable way to achieve the derecognition of a liability for tax purposes.
Frequently Asked Questions
Does a company’s insolvency automatically mean its debts disappear from the tax balance sheet?
No. According to the BFH, insolvency or illiquidity alone does not justify derecognizing a liability. The debt must be legally extinguished or waived to be removed from the tax balance sheet.
What is the difference between a standstill and a waiver?
A standstill agreement is a promise to delay collection, which the BFH classifies as a deferral. A waiver is the permanent abandonment of a claim, which legally extinguishes the debt and allows for its removal from the balance sheet.
Does this ruling apply to intra-group loan restructurings?
Yes. The court’s reasoning regarding the persistence of economic burdens applies to broader restructuring scenarios, including those under the StaRUG framework.
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