A new COVID-19 Tax Stimuli
A temporarily Carry-back of losses and special tax exempt reserve are on the table
A draft law is currently examined by the Belgian government to introduce the possibility for companies to carry-back the losses incurred during the COVID-19 crisis to compensate the taxable profits of the previous financial year. A “recovery reserve” would also be introduced, allowing companies to reduce their profits from tax years 2022, 2023 and 2024 by creating a tax free reserve up to the losses incurred in 2020. Note that similar mechanisms are foreseen for individuals but that our alert focusses on the measures for companies only.
These fiscal stimuli are still in draft and therefore may ultimately be different if and when introduced. For the time being, the headlines of the current proposal are as follows.
Upon the actual implementation of these measures, EY expects quite some question on the actual application and interaction with other measures in the Belgian income tax system. We will closely follow the developments and inform you on these matters.
Today, tax losses can only be carried forward and no carry-back to previous tax years exist. As an (one-time) exception to this rule, the government is considering to introduce this as a COVID-19 fiscal stimulus. The principle would allow companies to deduct the estimated tax loss they expect to realize in the current financial year (“i.e. the COVID-19 Year”) from the taxable profit of the tax year preceding the COVID-19 Year (“i.e. the Deduction Year”). This would reduce the taxable basis and tax due in the Deduction Year and effectively achieve a carry-back. It is however not a carry-back of a final determined tax loss but of an estimate thereof.
The amount so-deducted would then be added to the tax base in the COVID-19 Year and be compensated with the actual loss realized in that year. Technically, this would be realized through a reserve in the tax return.
The Deduction Year would be any financial year closing between 13 March 2019 and 12 March 2020 and the COVID-19 Year obviously the following financial year.
Therefore, companies completing their tax return for the previous year (e.g. the financial year closing on 31 December 2019 ) will need to estimate the loss they expect to make in the COVID-19 Year. In any case, the carry-back cannot exceed the taxable profit of the Deduction Year. Hence, if there is no taxable income in the Deduction Year, no carry back can be applied. If the tax return of the Deduction Year has already been filed, an adjustment will need to be filed.
If the losses of the COVID-19 Year have been over-estimated with more than 10% and the taxation of the deducted amount results in a taxable profit in the COVID-19 Year, a special surtax will apply at a rate of 2% to 40%, depending on the relative scale of the deviation. The surtax will apply on the amount of the taxes that are due on the profit that is in excess of the 10% margin of error.
If there is a change in the applicable tax rate between the Deduction Year and the COVID-19 Year, an adjustment mechanism would be applied so that the tax on the amount is the same. This adjustment can also have an impact on the amount that can be deducted.
Different from the utilization of carried forward tax losses, no 30% limitation on the utilization of these tax losses seems to be considered.
Some important conditions and limitations apply :
- The company may not have executed any form of reduction or distribution of equity (including buy back of own shares) between 12 March 2020 and the filing of the tax return for tax year 2021
- The reserve and thus the carry back cannot exceed 20 MEUR
- Companies subject to specific tax regimes such as investment companies or companies that benefit from the shipping tax are excluded
- Companies that directly hold shares in companies located in tax havens are also excluded
- Companies that make yearly payments of at least 100.000 EUR to tax havens are excluded unless it is demonstrated that these payments are made in the framework of real and sincere transactions that correspond to legitimate economical or financial needs
The recovery reserve
In addition to carry back, companies will be allowed to temporarily exempt taxable income (up to the accounting loss) in the following 3 taxable years under a so-called recovery reserve.
It allows the creation, during tax years 2022, 2023 or 2024, of a tax free reserve that would reduce the taxable profit of that period. The recovery reserve cannot exceed the operational loss of the accounting year closed in 2020. An exception would apply for companies closing between 1 January 2020 and 12 March 2020 in which case it is the loss of the accounting year closed in 2021 that can be used.
The amount allocated to this reserve in a specific year cannot exceed the reserved taxable profits of that year and must be recorded in a specific equity account in order to remain temporarily tax exempt.
The same conditions and limitations apply as for the carry-back (cf. above).
In some cases, the taxation of the recovery reserve as a result of the conditions no longer being met, would only be partial. This would be the case for equity reduction/distribution and buy back of own shares in which case the taxation of the reserve is proportionate. There is also a specific limitation condition foreseen linked to the changes in the salary pool of the company. If the amount booked in account 620 “remunerations and social benefits” drops below 85% of the amount that was booked in the accounts closed in 2019, the recovery reserve becomes taxable up to the amount of the reduction.