Real Estate Rehabilitation Transfers under Law 4738/2020 - Tax Exemptions and Relationship Formation

Legal Insight

May 2024

Anta Tsogia, LL.M. (mult.)

Summary: The collective pre-insolvency rehabilitation procedure is the most useful tool for debt regulation for viable businesses, allowing them to enter into and implement flexible agreements in terms of content. In previous articles regarding the regulatory framework of the rehabilitation process, we focused on the two fundamental principles that govern the process and define the possibilities for regulation: the principle of equal treatment of creditors in the same position and the principle of collective satisfaction of creditors without worsening their position. We also discussed the company's possibilities for debt regulation towards Public Entities. This article will particularly address the inclusion in the rehabilitation agreement of a clause for repaying certain debts through the transfer of the company's real estate, the tax advantages provided for the company, and how this choice affects the relationships between the parties covered by the agreement.

1. Introduction

According to Law 4738/2020, the rehabilitation process is a collective pre-insolvency procedure aimed at maintaining, utilizing, restructuring, and restoring the company by validating the relevant agreement without harming the collective satisfaction of creditors. Under the applicable legislative provisions, the company under rehabilitation can agree with its creditors on any arrangement of its assets and liabilities, depending on the rescue strategy it chooses to follow. The indicative content of the rehabilitation agreement, as provided in Article 39 of the said law, includes the possibility of regulation through the sale of individual assets. In this case, significant tax benefits are provided for the company to remove a series of obstacles and disincentives in the restructuring of assets and liabilities or the liquidation of assets.

2. Debt Restructuring through Asset Disposal

In the context of the private autonomy of the parties, the contracting parties (the debtor company and its creditors) can freely shape the content of the rehabilitation agreement after negotiations. The only limit set is the purpose of the rehabilitation institution, within which the agreement must include measures aimed at maintaining, utilizing, restructuring, and restoring the company, ensuring that the collective satisfaction of creditors is not harmed so that it can be validated by the competent court.

Article 39 of Law 4738/2020 mentions the potential configurations: "1. The rehabilitation agreement may involve any arrangement of the debtor's assets and liabilities and especially: […] e) The sale of individual assets of the debtor. […]". This case seems to concern the company's assets that are not directly related to its productive activity to ensure its uninterrupted operation (e.g., the sale of auxiliary properties). It is noted that it is also possible to agree on the transfer of the entire assets of the company or part thereof or specific elements of the assets, and if explicitly provided in the agreement, part of the company's debts, while the remaining obligations may be settled from the sale proceeds of the company or part thereof, be written off or, in the case of transferring part of the company, remain as obligations of the debtor or be capitalized.

3. Tax Advantages – Facilitations

a) Income Tax Exemption: The main tax advantage according to paragraph 3 of Article 170 of Law 4738/2020 is: "The profit from the transfer of the debtor's assets pursuant to a rehabilitation agreement is exempt from income tax for natural and legal persons."

The circular E2032/2024 for completing and clearing the corporate income tax return for 2023 mentions: "Code 496 records the profit from the transfer of assets pursuant to a rehabilitation agreement or liquidation under Law 4738/2020." If this profit is distributed, it is taxed as business profit regardless of tax losses. Circular E.2028/2024 Instructions for completing form E3 mentions that "Codes 144, 244, 344, and 444 'Less: Tax-exempt income' include amounts exempted by the relevant laws, such as the benefit from the deletion or regulation of debts under Article 170 of Law 4738/2020."

The legislative rationale is to remove disincentives for asset transfers within rehabilitation agreements. The benefit is intended exclusively for the rehabilitated company, not its shareholders, hence the tax applied to distributed profits.

b) Exemption from Stamp Duty and Indirect Taxes or Fees: According to paragraph 4 of Article 170 of Law 4738/2020: "Contracts and actions within the rehabilitation agreement are exempt from stamp duty and other indirect taxes or fees (except VAT). These exemptions occur automatically without needing any declarations to the tax authorities."

According to Legal Opinion 14/2022, an under-rehabilitation company's corrective notarial act for property acquisition agreements is exempt from related fees and duties.

c) Exemption from Donation or Income Tax: The rehabilitated company benefits from debt write-offs resulting from property sales.

d) Limitation of Notary, Lawyer, Bailiff, and Registrar Fees to 30% (Article 171, paragraph 1 of Law 4738/2020).

e) No Debt Assumption in Asset Group Transfers: According to paragraph 4 of Article 171 of Law 4738/2020, the transferee does not assume the transferred assets' debts, unlike acquisitions outside the rehabilitation framework.

4. Other Issues – Relationship Formation

In cases of rehabilitative measures involving the sale of the debtor's assets, further points include:

No specific asset disposal process is defined by law, leaving it to the debtor company to find buyers and negotiate terms.

The issuance of clearance certificates is required under Article 60, paragraph 6 of Law 4738/2020, ensuring compliance with the rehabilitation agreement.

Encumbrances and seizures may be lifted as part of the agreement, even contrary to existing regulations.

The company's governing body can decide on asset disposal without shareholder or partner consent unless otherwise required by law.

5. Conclusion

Organizing and implementing the rehabilitation process is a strategic choice for each company, which can be executed differently based on specific economic conditions. The possibility of asset disposal appears crucial for companies with liquidity shortages. Legislative support for restructuring businesses to ensure their viability, given their economic contribution, is clear and confirmed by the removal of obstacles and disincentives, particularly through tax exemption provisions.