Federal Fiscal Court: Recognition of Liabilities in Insolvency

Germany's Federal Fiscal Court (BFH) has issued a ruling clarifying the recognition of liabilities in insolvency situations. In its decision dated April 21, 2026 (case no. IX R 34/24), the court stated that even if a creditor temporarily refrains from asserting a claim in an insolvency proceeding, the liability must still be recognized in both the commercial and tax balance sheets.

The case involved an insolvent German limited liability company (GmbH) that had loan claims filed against it. In a court settlement, the creditor agreed to withdraw these filings and not pursue them in the insolvency proceedings. The company's insolvency administrator subsequently derecognized the loan liability in its tax balance sheet, treating it as tax-free operating income. Tax authorities, however, viewed this as taxable income.

The BFH disagreed, ruling that the creditor's agreement did not constitute a legal waiver of the claim under German Civil Code Section 397. Such an agreement, described as a "stand-still" or deferral, does not eliminate the economic burden of the debt. The court found that the continued legal existence of the claim and the possibility of asserting it later meant the liability must remain recognized. Furthermore, the BFH clarified that this situation did not fall under the prohibition of recognizing liabilities in the tax balance sheet as per Section 5 (2a) of the German Income Tax Act (EStG), as the repayment was not exclusively contingent on future receipts.

The decision reinforces the principle that mere declarations or temporary agreements in insolvency proceedings do not automatically lead to the derecognition of liabilities. The liability must continue to be recognized unless its enforceability is virtually certain to be excluded. This aligns with established tax practice and prevents taxable gains from arising solely due to such arrangements.