Now that the Tax Authority in the Netherlands is scaling back the leniency from the coronavirus period, thousands of businesses are facing financial difficulties. What should you do if the tax authorities come knocking? And how does the UWV approach reclaiming wage support? Five questions about debt restructuring.
In the first ten months of 2023, 60% more companies went bankrupt compared to the same period a year earlier, according to CBS data. Currently, nearly 300 companies go bankrupt each month, particularly in the trade sector. However, this is still well below the record of over 900 monthly bankruptcies recorded in 2013. Currently, approximately 27,000 companies have outstanding tax debts. Since the Tax Authority has begun collecting these debts, it is possible that the number of bankruptcies will continue to rise.
Partially. Here’s some context to explain:
Due to the COVID-19 pandemic, many companies faced financial difficulties, for example, because they were forced to close and saw their revenues plummet. More than one in three businesses benefited from the financial support offered by the government. Deferred tax payments were one of the support measures. As a result, corporate debt to the Tax Authority ballooned during the pandemic to over 15 billion euros. The leniency policy had two components. Firstly, the deferral of tax payments. This is no longer in effect. The Tax Authority began collecting debts in the summer of 2023, contributing to the rise in bankruptcies.
Secondly, the Tax Authority adopted a flexible approach to debt restructuring requests. Previously, the Tax Authority, as a preferential creditor, demanded at least double the percentage of repayment compared to non-preferential creditors. This requirement was waived during COVID-19, and the Tax Authority accepted the same percentage payout as other creditors. The extension of the leniency policy only applies to this flexible stance on debt restructuring requests. The Tax Authority continues to accept the same percentage as other creditors in settlements. This relaxation is extended until April 1, 2024.
Not quite. The Tax Authority is now approaching debt restructuring far more formally. In the past, companies could provide a letter from their accountant to demonstrate their viability with additional financing, which was often enough for creditors to agree to a repayment plan. Now, the Tax Authority applies the same conditions to debt agreements as the court does in a so-called WHOA procedure. Under the Act on Court Approval of Private Restructuring Plans (WHOA), companies can negotiate agreements with creditors before bankruptcy or suspension of payments and have them ratified by a judge.
An accountant’s letter is no longer sufficient. The Tax Authority will not approve an agreement without a convincing liquidity forecast, as well as valuations of both the reorganization value and the liquidation value. This requires input from three external advisors – a valuation expert, an appraiser, and a lawyer. The costs of such a process can quickly reach €50,000. So, while leniency still exists, it comes at a price.
For many SME entrepreneurs, this heavy procedure poses a significant hurdle. Increasingly, entrepreneurs consider allowing their companies to go bankrupt and repurchasing the business assets from the liquidator. This formal stance by the Tax Authority can undermine debt restructuring, causing further damage to creditors.
During the COVID-19 pandemic, companies could apply for temporary wage support (NOW) from the UWV, enabling them to continue paying employees and preserve jobs. The amount of wage support was based on lost revenue. If revenue loss turned out to be lower than anticipated, part (or all) of the wage support had to be repaid. The UWV applies the same conditions to debt restructuring as the Tax Authority. Initially, to avoid providing unlawful state aid, the UWV consistently pushed for a formal and costly WHOA procedure through the courts. Recently, however, the UWV dropped the requirement for court involvement but still demands the same costly documentation and substantiation as required in a WHOA procedure.
That depends on the situation. Do you, as an entrepreneur, feel responsible for minimizing harm to your creditors? If so, debt restructuring—such as through a court-approved settlement—may be the best path forward. SME entrepreneurs who pursue the WHOA route can apply for a TOA loan (Time-out Arrangement). This government credit facility helps cover the costs of the procedure, working capital, and business assets. Companies that act early can avoid going to court, as explained in this article. A bankruptcy followed by a restart is another option. However, there is a risk of losing clients due to the potential for negative publicity. Proper preparation can minimize the duration of the process and increase the chances of success.
In all cases, it is crucial to thoroughly map out the alternatives and carefully weigh the pros and cons.
