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The role of tax in debt restructurings - news article image

The role of tax in debt restructurings

4 May 2020

2 minute read

Companies struggling to repay external debt can frequently look to reduce their exposure through:

  • Seeking a debt waiver
  • Swapping debt for equity, or
  • Renegotiating the terms of the debt owed

Debt waivers

The preliminary point for a distressed company will frequently be to consider whether it can lessen its external debt liabilities in quest of a formal waiver of debt from its creditors.

Creditors can agree to formally waive some debt if they contemplate it to be in their benefit to do so (for example, it might aid the debtor company’s survival).

Consequently, as the accounts would recognise a credit there potentially would be a taxable profit, unless an exemption is available for which there are several that could be considered. For example but not limited to corporate rescues, connected company provisions and insolvency arrangements.

Debt/equity swaps

As opposed to releasing a debtor from its obligation to repay debt, creditors can agree to release debt in exchange for an issue of shares in the debtor company (i.e. a debt/equity swap).

The anticipation for the creditor is that those shares may increase in value over time due to the fact that the debtor company will be more financially stable after the release of its debt obligations.

A credit arising on a release of debt in such circumstances is exempt from tax where the release is in consideration of shares forming part of the ordinary share capital of the debtor company, or any entitlement to such shares.

Renegotiating debt

Sometimes lenders may just prefer to renegotiate the terms of debt with the borrower, rather than waive the debt or swap it for equity.

Therefore another option could be for lenders to agree to subordinate their debt (i.e. the lender agrees not to be paid by the debtor until other creditors have been paid). The main tax and accounting questions in these circumstances will be:

  • What is the accounting treatment of the amendment and could this trigger a taxable credit?
  • If so, it may be necessary to consider whether it would be more beneficial to release the debt (as opposed to modifying the loan) and rely on one of the tax reliefs outlined above?
  • where terms of the debt are renegotiated, will interest payments under the amended debt continue to be deductible for tax purposes?

As one debt restructuring is seldom the same as another and a wide range of tax issues may arise in any given scenario, if you are reviewing your debt, at Shaw Gibbs we can help you consider whether the debt restructuring is being effected in a tax-efficient manner, with a view to:

  • Minimising tax costs that arise on the restructuring, and/or
  • Preserving the availability of losses going forward
The role of tax in debt restructurings - news article image


James Painter

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