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Coronavirus – Draft bill for one-off loss carry-back and possible tax free recovery reserve - Belgium

  • Belgium
  • Coronavirus - Tax issues
  • Tax planning and consultancy

19-06-2020

The Belgian government has introduced a draft bill in Parliament providing for an optional one-off carry-back of tax losses for companies and individuals[1]. The measure is intended to strengthen companies’ cash-flow positions pursuant to the eruption of the Covid crisis on March 12, 2020.

The draft text also introduces the possibility to create a tax-free “recovery reserve” for assessment years 2022, 2023 and/or 2024 with the intention of allowing companies to improve their solvency.

If adopted, these measures may evidently offer a much-needed source of oxygen for some taxpayers. Their application will however require a certain degree of planning and attention. The proposed measures are quite novel in some respects, given that there is no general loss carry-back regime in Belgium and that both measures are unavailable for taxpayers that have dealings with tax havens.

Accelerated deduction of losses

General description

Companies that have closed their last financial year between March 13, 2019 and March 12, 2020 (“Pre-Covid FY”), may have done so with a positive tax base. As a result, they will either need to pay the income tax when they receive their tax assessment or to offset the prepaid income tax against the assessed tax amount.  

Many such companies have come under great economic pressure due to the Covid crisis and are likely to close their subsequent financial year (“Covid FY”) with tax losses. Absent a general tax loss carry-back regime under current tax law, such companies would have to pay income tax in relation to their Pre-Covid FY (or could not recover the tax they have already prepaid), whilst sitting on potentially large income tax losses realized during the Covid FY. This would only exacerbate their liquidity problems.

The draft bill aims to solve that issue by allowing such company to offset the tax losses it realizes during its Covid FY against its positive Pre-Covid FY tax base. This accelerated deduction of tax losses is neutralized in the subsequent year (the Covid FY), as the company must then increase its tax base for that year by the amount of losses it carried back to the Pre-Covid FY.

In practice, many such companies will have to file their income tax return for their Pre-Covid FY before their Covid FY closes. They will consequently have to estimate the amount of tax losses they will suffer during their Covid FY before closing. Such estimation will have to be made with care, as an overestimation of the losses may be sanctioned by an additional special tax. Given the difficulty of estimating tax losses for an on-going exercise, the draft bill provides that no such increase will apply if the overestimation does not exceed 10% of the tax losses effectively suffered. The percentage of the tax increase will vary between 2% and 40%, depending on the size of the overestimation.

Example:  

Company X closes its Pre-Covid FY on December 31, 2019 with a positive tax base of 2.000.000 EUR. The company must file its income tax return for that financial year by the fall of 2020.

The company estimates that it will realize a tax loss of 1.200.000 EUR at closing of its Covid FY (closing on December 31, 2020). These losses eventually turn out to be inferior (1.100.000 EUR).

The measure allows the company to reduce its Pre-Covid tax base to 800.000 EUR in its Pre-Covid FY tax return (2.000.000 – 1.200.000). It will have to neutralize that deduction by increasing its tax base by an amount of 1.200.000 EUR in its return of the subsequent year (Covid FY). This operation will result in a positive tax base of 100.000 EUR for Covid FY, given that the losses effectively amount to 1.100.000 EUR.

No tax increase will apply, as the overestimation (100.000 EUR) does not exceed 10% of the effective tax losses suffered (1.200.000 EUR).

Eligible companies

The measure is available for all Belgian resident companies and Belgian establishments of foreign resident companies. Certain companies are however excluded from this regime:

Companies that are not subject to the ordinary corporate income tax regime, such as certain investment funds, pension funds, etc.;

Companies that decrease their equity by means of a share redemption, a dividend distribution or a capital decrease at any time between March 12, 2020 and day of filing of their tax return for their Covid FY;  

Companies that hold a direct participation in or make payments in excess of 100.000 EUR to a company established in a tax haven between the March 12, 2020 and the day of filing of their tax return for their Covid FY. A company making such payments may nevertheless be eligible to use the loss-carry back measure, if it can prove that these payments were made in the framework of real and genuine transactions that result from legitimate financial or economic needs.

A jurisdiction is considered a tax haven if (i) it is listed by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes as not effectively and substantially implementing the OECD standard for exchange of information, or (ii) if it figures on a Belgian list of tax havens[2]. Although the condition regarding the tax havens is somewhat justifiable, it nevertheless raises certain questions to the extent it does not convey the possibility to the taxpayer to justify why it holds a tainted participation, whereas such exit is available for payments made to tax havens.

Maximum amount

The carry-back amount is limited to the company’s Pre-Covid FY result of the year (i.e. the increase or decrease in reserved profits of the year, increased by the disallowed expenses and the distributed dividends). That result must be decreased with exempt dividend income and innovation income. The carry-back amount is further subject to an overall cap of 20.000.000 EUR.

Intermediate changes to the income tax rate

The measure is supposed to bolster liquidity whilst being tax neutral by design. The latter is only achievable if both (Pre-Covid and Covid) financial years are subject to the same income tax rate.

The corporate income tax rate has decreased twice in the last years[3]. It may therefore occur in practice that different rates apply to the Pre-Covid FY and the Covid FY. The draft bill has foreseen a relatively complex mechanism to counter that difference and to ensure the neutral character of the measure.

Formalities and timing

Technically, the measure is claimed by constituting a temporary tax-exempt reserve for an amount equal to the (estimated) Covid FY tax loss the company wishes to deduct from its Pre-Covid FY tax base. The constitution of that reserve will have to be made by means of a separate form that will be determined by Royal Decree.

A specific procedure will be set-up by Royal Decree allowing companies that have already filed their tax return for their Pre-Covid FY, to amend their return. Companies that have already received a tax assessment for that Pre-Covid FY may claim the benefit of the measure by filing a petition against the assessment. 

It is further stated in the preparatory works, that companies that have already made income tax prepayments in relation to their Pre-Covid FY, will be able to recover these prepayments in an accelerated manner.

Recovery reserve

General description

The second measure is aimed at allowing companies to improve their solvency. Companies may allocate part of their accounting profit to a so-called recovery reserve. They may do so for the financial years linked to assessment years 2022, 2023 or/and 2024[4]. Such recovery reserve remains exempt from tax as long as certain conditions are met.

Eligible companies

Like for the loss carry-back, the recovery reserve may be constituted by all Belgian resident companies and Belgian establishments of foreign resident companies, with the same list of exceptions (see above[5]).

Maximum amount

The amount of the recovery reserve is capped as follows:

In aggregate, the recovery reserve constituted for assessment years 2022-2024 may not exceed the amount of accounting losses suffered by the company during its financial year that closed in 2020[6], with an absolute cap of 20.000.000 EUR. If a company closed its 2020 financial year before the Covid crisis erupted[7], the amount of accounting losses suffered during the following year will be taken as maximum reference;

Each year, the maximum amount that may be affected to a recovery reserve may not exceed the taxable reserved profits of that given year.

Conditions to maintain the tax-free character of the recovery reserve

The recovery reserve remains tax free as long as it is maintained on a separate unavailable equity account and cannot serve as a basis for the calculation of the annual dotation to the legal reserve or of any remuneration or attribution. If these conditions remain fulfilled at all time, the amount of that reserve will only become taxable upon the liquidation of the company.

Consequently, the recovery reserve will become taxable to the extent the company makes equity distributions or reduces its personnel cost by more than 15% compared to its financial year that closed in 2019. Such taxation will occur in the year during which such events occur. 

The reserve account becomes entirely taxable in the event the company (i) takes a direct participation in a company established in a tax haven or (ii) makes payments in excess of 100.000 EUR to such companies, unless it can be proven that these payments were made in the framework of real and genuine transactions that result from legitimate financial or economic needs.

Comment

Both measures should be welcomed, as they offer a certain degree of relief to companies that are as such profitable, but which have to recover from the losses suffered during the Covid crisis.

The loss carry-back should obviously have the most direct impact, as it focuses on leveraging the negative tax impact from the Covid-crisis to alleviate a company’s tax bill for the previous year. It is therefore by definition limited to companies that were in a tax-paying position for their Pre-Covid FY. The rather complex nature of the measure may be largely attributed to the fact that it is a one-off measure and that Belgium does not know a general loss carry-back regime that could simply be adapted to attain the same positive cash-flow effect. Companies that wish to use that measure should do so carefully, as it may generate certain unexpected consequences (e.g. in combination with the use of the recently adopted consolidation regime).

Companies that were not in a tax-paying position during the Pre-Covid FY could still benefit from the oxygen offered by the recovery reserve, provided of course that they become profitable again and that they can hold out until 2022-2023.

Companies may combine both measures. It should be noted though that the tax saving of the loss carry-back should be recorded in the accounting of the Covid-FY[8], which would thus reduce the accounting losses of that FY. The recovery reserve being capped at the amount of that accounting loss, the combination of both measures should therefore be applied with a certain degree of planning.

Finally, shareholders that are considering an equity distribution in the coming weeks and months should bear in mind that such distribution could (partly or entirely) disqualify their company from benefitting from these measures. Certain companies may have suffered considerable losses due to Covid but may nevertheless be in a position to make such distribution. Shareholders should understand the loss of opportunity that such distribution could cause.


[1] The scope of the current alert is limited to companies.
[2] The list contains the following jurisdictions at this date: Abu Dhabi, Ajman, Anguilla, Bahamas, Bahrein, Bermuda, BVI, Cayman Islands, Dubai, Fujairah, Guernsey, Jersey, Isle of Man, Marshall Islands, Micronesia, Monaco, Montenegro, Nauru, Palau, Pitcairn Islands, Ras al Khaimah, Saint-Barthélemy, Sharjah, Somalia, Turkmenistan, Uzbekistan,  Umm al Qaiwain, Vanuatu, and Wallis and Futuna.
[3] A reduction from 33,99% to 29,58% as of assessment year 2019 linked to a financial year starter on or after January 1, 2019, and a further reduction to 25% as of assessment year 2020 linked to a financial year starter on or after January 1, 2020.
[4] If the company’s financial year coincides with the calendar, these assessment years are financial years 2021, 2022 and 2023.
[5] With the difference that companies are not eligible if they reduce their equity at any time between March 12, 2020 and the day of filing of their tax return for the relevant assessment year.
[6] The Commission for accounting norms has indeed indicated that the tax saving related to the loss carry-back may only be booked in the accounts of the Covid FY, which would thus reduce the accounting losses for the year used as reference for the recovery reserve.
[7] Between January 1 and March 12, 2020.
[8] The Preparatory Works refer to a statement by the Belgian Accounting Standards Commission in this respect.

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