At the start of the COVID-19 crisis, the federal and regional governments immediately implemented a number of tax (and other) measures. Those first measures were mainly focusing on preventing any cash flow problems for companies and for the self-employed.
On the long term however, not only the (lack of) cash flow causes issues. The impact of the current crisis goes far beyond cash flow and it is certain that it will take several years before the impact of the economic crisis will be digested.
In view of the above mentioned, the federal government has planned two interesting tax support measures: the carry back of tax losses and the creation of an (equity) “reconstruction reserve”. The “carry-back” has been included in a law of 23 June. For the “reconstruction reserve”.it only concerns (draft) legislative texts.
To prevent that a company with an expected tax loss for (for example) accounting year 2020 will have to pay taxes regarding accounting year 2019, exceptionally the company will be able to create a tax free “Covid-19 reserve” for the amount of expected tax losses over 2020 at charge of the taxable result of accounting year 2019. For companies, it specifically concerns accounting years ended between 13 March 2019 and 31 December 2020 that are able to deduct the expected tax loss of the following year. This will (de facto) result in a backwards loss compensation or a “carry back” of tax losses. The measure would be applicable for the self-employed (personal income tax) as well as companies (corporate income tax).
The reserve can be created through an annex 275.COV to the tax return that needs to be filed regarding accounting years closing between 13 March 2019 and 31 December 2020 (corporate income tax) / income year 2019 (personal income tax). In case the tax return (regarding the year in which the taxable result should be decreased) has already been introduced (e.g. accounting years closed before 31 December 2019), a form 275.COV should still be introduced. In such case, the ultimate date of introduction will be 30 November 2020. The reserve should not be expressed in the bookkeeping and therefore (when it concerns a company) will not have to be reported in the financial statements.
The taxable result of accounting year / income year 2019 will be decreased with the “Covid-19 reserve” and will be used in the following year to compensate for the tax losses in that accounting year (closed between 13 March 2020 and 31 December 2021). The consequence will be that the accounting results for 2 years (mostly 2019 and 2020) will be combined and therefore the overall tax burden (for these 2 years) will be reduced.
The “Covid-19 reserve” may not exceed the taxable result of the accounting year closed between 13 March 2019 and 31 December 2020 (for companies, this will be the result after application of, amongst others, the participation exemption) and will need to match closely with the (yet to be determined) losses of the following accounting year. A deviation of maximum 10% is tolerated and does not result in an additional taxation. Should the tax losses of 2020 turn out to be lower than 90% of the “Covid-19 reserve” (and therefore show a deviation that exceeds the tolerance of 10%), part of the reserve will still need to be taxed in 2020 (at the rates applicable for 2019 and including a penal interest).
As a result of the “Covid-19 reserve”, it will be possible to avoid or limit the taxes that will be due for 2019, in which tax prepayments that have already been made will be reimbursed by the tax authorities.
Although we do not yet know the exact interpretation by the Tax administration of the rules, hereafter we will attempt to apply the above-mentioned principles to an example (under reservation):
Situation per 31 December 2019:
Accounting profit of the accounting year 2019 950 KEUR / tax prepayments for the amount of 295 KEUR
Situation per 29 October 2020 (deadline for filing the corporate income tax return for assessment year 2020):
Taxable result accounting year 2019 (assessment year 2020): 1,000 KEUR / corporate taxes due 295 KEUR
Prognose for the current accounting year 2020: tax loss of 1,000 KEUR
The company opts to create a “Covid-19 reserve” through the corporate income tax return accounting year 2019 (assessment year 2020) for 1,000 KEUR. Result:
- Taxable result accounting year 2019 (assessment year 2020) is fully reduced to 0 EUR
- No corporate income tax due
- Full reimbursement of tax prepayments for the amount of 295 KEUR
Situation per 31 December 2020 (to determine when filing the corporate income tax return for assessment year 2021):
Scenario 1: the tax losses for accounting year 2020 amount to 1,000 KEUR. This loss will be compensated against the “Covid-19 reserve”. No carried forward tax losses.
Scenario 2: the tax losses for accounting year 2020 amount to 1,200 KEUR. This loss will be compensated for the amount of 1,000 KEUR by using the “Covid-19 reserve”. The balance of 200 KEUR will be added to the tax losses to be carried forward.
Scenario 3: the tax losses for accounting year 2020 amount to 650 KEUR. This loss will be compensated against the “Covid-19 reserve”. The balance of 350 KEUR of the “Covid-19 reserve” will immediately be taxable (at the rates applicable for 2019 and with application of an additional tax charge).
Of course there are certain conditions attached to the applicability of this “carry back” measure. Companies that grant dividends, repurchase their own shares and / or reduce their share capital between 12 March 2020 and the date of filing of their corporate tax return for tax year 2020 (so probably September-October 2021), cannot benefit from this measure. Moreover, companies that make payments to “tax havens” without a real economic activity or that have a participation in a company that is established in a tax haven are excluded of the measure.
In case the equity and the solvency of companies is affected by their losses in 2020, creating a tax exempt (equity) “reconstruction reserve” for the period 2021-2023 could allow a reconstruction of the accounting equity to the level of 2019.
The amount of the reconstruction reserve will (at most) equal the operational loss of 2020, with a maximum of 20.000 KEUR.
The creation of the reserve can be spread over the years 2021-2023 and will qualify as a temporary tax exempt reserve that will be subject to the well-known “intangibility condition”.
Contrary to the “Covid-19 reserve”, the reconstruction reserve will be expressed in the bookkeeping (and the financial statements). The reconstruction reserve will decrease the taxable result of the company in the years that the reserve will be created.
Of course there are certain conditions attached to the tax exemption of the reconstruction reserve. In certain situations the reserve will immediately become taxable, whether or not at an increased rate:
