Currently, if a UK company is released from a debt owed to an unconnected creditor, the default position is that this will be a taxable event for the debtor company and its accounts will recognise a (taxable) credit in respect of this release. Further, where a debt that was previously held by an unconnected party to the debtor company becomes “connected” a “deemed” release of debt may arise, which may give rise to the same issues (although there is a limited exception where debt becomes connected as part of a corporate rescue). In addition, if an “amend and extend” restructuring of debt is undertaken and this gives rise to a “substantial modification” or a reduction in the net present value of the cashflows arising under the relevant loan by at least 10 per cent, the debts may need to be re-recognised in the parties’ accounts and this may result in the UK debtor recognising unfunded taxable credits.

It is important to note, however, that there are exemptions to the tax charge for debtor companies described above, most notably for debt/equity swaps and certain formal insolvency and restructuring procedures. However, these rules generally need to be considered carefully in a restructuring scenario.

The UK tax laws also need to be considered carefully on behalf of any UK creditors; for example, whether the creditor will get bad debt relief (generally not the case where the creditor controls the debtor).  Read More.