Debt releases
- Applies
- FY2024 onwards
- Reviewed
- Rule
- P2-DEBT-2024.1
Is income from a debt release taxed under Pillar Two?
Not by election, where the release is in supervised insolvency, avoids insolvency within 12 months, or comes when liabilities exceed the value of assets.
Per Consolidated Commentary to the GloBE Model Rules (May 2026), Commentary to Article 3.2.1, Debt releases under prescribed circumstances
The amount of a debt release included in the Financial Accounting Net Income or Loss is excluded from the computation of a Constituent Entity's GloBE Income or Loss, where the Filing Constituent Entity elects to do so and the debt release is undertaken under statutorily provided insolvency or bankruptcy proceedings that are supervised by a court or other judicial body, or where an independent insolvency administrator is appointed; or arises pursuant to an arrangement where one or more creditors is a person not connected with the debtor and it is reasonable to conclude that the debtor would be insolvent within 12 months but for the release of the third-party debts released under the arrangement; or occurs when the debtor's liabilities are in excess of the fair market value of its assets determined immediately before the debt release. In the first two cases both third-party and related-party debts released as part of the same arrangement are excluded. In the third, an amount is excluded only with respect to debts owed to a creditor not connected with the debtor, and only to the extent of the lesser of the excess of the debtor's liabilities over the fair market value of its assets and the reduction in the debtor's attributes under the tax laws of its jurisdiction resulting from the release.
Most tax systems do not tax a debt forgiven in insolvency, or reduce losses instead. Without this, the accounting gain would be untaxed GloBE Income and a failing company's rescue would attract Top-up Tax. The relief is confined to real insolvency, because a waiver between group companies would otherwise be an easy way to move income.
Three circumstances, taken in order
(a) Insolvency proceedings
A procedure under domestic law to reorganise a company in financial distress or wind it up in an orderly way, supervised or confirmed by a court or other judicial body — or the appointment of an independent administrator to control the company, even where no court is involved. Only debts legally waived after the administrator is appointed count. It makes no difference whether the creditor is connected with the debtor.
(b) A third-party arrangement that averts insolvency
An arrangement negotiated and agreed with creditors, at least one of whom is not connected with the debtor, where the debtor would be insolvent within 12 months without the release of the third-party debts. Insolvent here means unable to pay debts as they fall due, not a balance sheet test. The conclusion must rest on the opinion of a qualified independent party, who leaves debt owed to connected creditors out of the assessment. Related-party debts released under the same arrangement share the relief. The releases need not be in one document, but must be one plan.
(c) Liabilities exceed assets
Only where neither of the first two applies. Relief is limited to debts owed to creditors not connected with the debtor, and to the lesser of two amounts: what is needed to make the debtor solvent on a net asset basis — its liabilities less the fair market value of its assets immediately before the release — and the reduction in its tax attributes under local law caused by the release, counting attributes such as foreign tax credits that are not Covered Taxes.
Connected
A creditor is connected with the debtor where their relationship meets the test in Article 5(8) of the OECD Model Tax Convention.
By election, and the tax follows
Nothing is excluded unless the Filing Constituent Entity elects. Where an amount is excluded, the current tax on it and any deferred tax expense from the reduction in tax attributes are excluded from Adjusted Covered Taxes as well. Under (c) that applies only to the proportion of the debt that is relieved.
The ordinary intra-group waiver
A parent that simply forgives a loan to a solvent subsidiary is outside all three. The subsidiary's accounting gain stays in its GloBE Income or Loss.
Order of testing
- 1
Inputs requiring your determination
The circumstance, the election, and then the figures that circumstance needs.
- 2
The three circumstances
A release within none of them stays in income.
- 3
The election
Without it nothing is excluded.
- 4
The circumstances of the release
(a) and (b): the whole release, related-party debt included.
- 5
Liabilities in excess of the fair market value of assets
(c): third-party debt only, up to the lesser of the two limits.
Examples
Illustrative scenarios — ours, not the authority’s — each computed live by this rule. Change any fact and the outcome is the rule’s, not a hand-written answer.
A court-approved restructuring
A subsidiary in court-supervised reorganisation has EUR 80 million of bank debt and EUR 40 million of shareholder loans written off under the approved plan. With the election, all EUR 120 million is left out.
Computed
The whole income from the debt release, EUR 120,000,000, is excluded from GloBE Income or Loss for FY2026 as computed: it was made under statutory insolvency or bankruptcy proceedings supervised by a court or other judicial body, or after an independent insolvency administrator was appointed (paragraph 86.1(a)). Debts owed to related parties and to third parties are both excluded where they were released as part of the same arrangement. Current tax, and deferred tax arising from the reduction in tax attributes, relating to the excluded amount are left out of Adjusted Covered Taxes. Based on what you supplied.
Workings
- Income from the debt release in the accountsAs supplied
- EUR 120,000,000
- Adjustment to Financial Accounting Net Income or LossCommentary to Article 3.2.1, paragraph 86.3 — excluded in full
- (EUR 120,000,000)
Decided by the circumstances of the release
A negotiated standstill with lenders
No formal proceedings: the lenders agree to write off EUR 50 million, and the parent EUR 20 million, after an independent adviser concludes the company would be unable to pay its debts within the year otherwise.
Computed
The whole income from the debt release, EUR 70,000,000, is excluded from GloBE Income or Loss for FY2026 as computed: it arose under an arrangement with a creditor not connected with the debtor, and the debtor would have been insolvent within 12 months but for the release of the third-party debts (paragraph 86.1(b)). Debts owed to related parties and to third parties are both excluded where they were released as part of the same arrangement. Current tax, and deferred tax arising from the reduction in tax attributes, relating to the excluded amount are left out of Adjusted Covered Taxes. Based on what you supplied.
Workings
- Income from the debt release in the accountsAs supplied
- EUR 70,000,000
- Adjustment to Financial Accounting Net Income or LossCommentary to Article 3.2.1, paragraph 86.3 — excluded in full
- (EUR 70,000,000)
Decided by the circumstances of the release
Balance-sheet insolvent, no arrangement
A company whose liabilities exceed its assets by EUR 60 million has EUR 100 million forgiven — EUR 70 million by outside creditors, EUR 30 million by its parent — and loses EUR 50 million of tax losses as a result. Only third-party debt counts, capped by the smaller limit: EUR 50 million.
Computed
EUR 50,000,000 of the EUR 100,000,000 of income from the debt release is excluded from GloBE Income or Loss for FY2026 as computed. The release falls within paragraph 86.1(c), under which only debts owed to creditors not connected with the debtor — EUR 70,000,000 — can be excluded, and only up to the lesser of the excess of liabilities over the fair market value of assets, EUR 60,000,000, and the reduction in the debtor's tax attributes, EUR 50,000,000. Current tax, and deferred tax arising from the reduction in tax attributes, relating to the excluded amount are left out of Adjusted Covered Taxes. Based on the figures you supplied.
Workings
- Income from the debt release in the accountsAs supplied
- EUR 100,000,000
- Of which on debts owed to unconnected creditorsParagraph 86.1(c) — only these can be excluded
- EUR 70,000,000
- Excess of liabilities over the fair market value of assetsParagraph 86.1(c)(i)
- EUR 60,000,000
- Reduction in the debtor's tax attributesParagraph 86.1(c)(ii)
- EUR 50,000,000
- Adjustment to Financial Accounting Net Income or LossThe third-party amount, up to the lesser of the two limits
- (EUR 50,000,000)
Decided by the liabilities in excess of the fair market value of assets
A parent waives a loan to a solvent subsidiary
An intra-group loan is forgiven as part of a capital tidy-up. The subsidiary is solvent and no outside creditor is involved.
Computed
The income from the debt release stays in GloBE Income or Loss, as determined: the release was not made in insolvency proceedings, nor under a third-party arrangement that averted insolvency, nor while the debtor's liabilities exceeded the fair market value of its assets. Based on the determinations you supplied.
Decided by the three circumstances
Try it
Supply the facts and this rule computes the outcome in your browser, live. Leave a determination undecided and it blocks the result — it is never read as a no.
Not computed yet
1 input still need your determination:
- Which describes the release, taking the first that applies? (a) It was made under statutory insolvency or bankruptcy proceedings supervised by a court or other judicial body, or after an independent insolvency administrator was appointed. (b) It arose under an arrangement with at least one creditor not connected with the debtor, and a qualified independent party has concluded the debtor would be insolvent within 12 months but for the release of the third-party debts. (c) The debtor's liabilities exceeded the fair market value of its assets immediately before the release. Or none of these.
Computed in your browser from the figures you supply. Nothing is sent anywhere, and the result is a computation against a rule — reference, not tax advice.
Sources
Consolidated Commentary to the GloBE Model Rules (May 2026) — Commentary to Article 3.2.1, Debt releases under prescribed circumstances
Paragraphs 86.1 to 86.7: the three circumstances, the election, the tax that follows, and the terms used
https://www.oecd.org/content/dam/oecd/en/publications/reports/2026/05/tax-challenges-arising-from-the-digitalisation-of-the-economy-consolidated-commentary-to-the-global-anti-base-erosion-model-rules-2026_24289ddf/4377e89f-en.pdfGloBE Model Rules (Pillar Two), December 2021 — Article 8.3, Administrative Guidance
The article that gives agreed guidance its effect, subject to domestic law
https://www.oecd.org/content/dam/oecd/en/publications/reports/2021/12/tax-challenges-arising-from-digitalisation-of-the-economy-global-anti-base-erosion-model-rules-pillar-two_eed81a23/782bac33-en.pdf