How to Handle the Bankruptcy tax issues

Whether the bankruptcy income is taxable is determined in accordance with the provisions of the Bankruptcy Tax Act. The bankruptcy estate is not liable to tax on the bankruptcy income, unless SKAT exceptionally makes a decision on tax liability, cf. section 2 and section 15 (1) of the Bankruptcy Tax Act. 2 and 3. SKAT must make this decision on any tax liability within three months of receipt of the statement pursuant to the Bankruptcy Act, section 125, subsection. 2, cf. the Bankruptcy Tax Act, section 15, subsection 2. If SKAT’s decision has not been made before this deadline, the bankruptcy income is tax-free.

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If a bankruptcy estate is terminated as solvent, the estate is covered by section 144 of the Bankruptcy Act. Tax returns must be submitted for all income years from and including the bankruptcy year.

The present Situations

In the present situation, where the tax-free bankruptcy estate has exceptionally proved to be solvent, a rigorous application of the rules will result in a conflict of rules, which gives mutually incompatible results. The clash of rules is expressed by the fact that the bankruptcy estate is solvent, but only as long as the tax exemption is maintained.

The Aspect of Tax Liability

The tax liability provided for in section 5 of the Bankruptcy Tax Act cannot de facto be implemented, as the estate will still be insolvent and thus tax-free under section 2 of the Bankruptcy Tax Act. It is not provided in the wording of section 5 of the Bankruptcy Tax Act. Sections 2 and 5 of the Bankruptcy Tax Act must therefore be subject to interpretation, so that the provisions are delimited vis-à-vis each other and given a content with regard to their purpose and in accordance with general rules of interpretation. The best use of the income tax calculator is important.

How to Handle the Tax

It is important to understand that in the present situation one cannot achieve a result that is consistent with the wording of both sections 2 and 15 of the Bankruptcy Tax Act on the one hand and section 5 of the Bankruptcy Tax Act on the other. The bankruptcy estate will thus either end up as solvent and tax-free, which is immediately contrary to the wording of section 5 of the Bankruptcy Tax Act or as an insolvent estate which is contrary to the wording of section 2 and section 15 (1) of the Bankruptcy Tax Act. 2 and 3 are subject to tax liability, regardless of whether SKAT has not made a decision to this effect. This is precisely the situation that is characterized as a clash of rules.


The clear starting point is that bankruptcy income is tax-free, unless SKAT exceptionally decides otherwise. This is clearly stated in the Tax Law Council’s opinion in report 1101/1987, section 7.5.1 The Tax Law Council has therefore proposed it under 7.4. said solution, according to which the taxation can in principle be maintained with the bankrupt estate, but the taxation must not be enforced unless the tax authorities exceptionally decide so.


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About the Author: Clare Louise