How a tax shelter investment can be a solution to anticipate the uncertain financial results of your company due to a negative impact of the Corona crisis and how such tax shelter investment can reduce the net cash flow impact of corporate tax prepayments?

Context

Since 1 January 2018, a tax increase of 6,75% on the initial corporate income tax liability is applied to Belgian companies if they do not or insufficiently prepay their estimated corporate tax liability during the financial year.  In order to avoid such tax increase, although optional, Belgian companies are encouraged to perform sufficient and timely corporate income tax prepayments.

Only if sufficient corporate tax prepayments are made before some specific dates, a tax credit is attributed to each corporate income tax prepayment , which will offset wholly or partially the tax increase of 6,75% of the initial (estimated) corporate income tax liability, but such tax credits can never give rise to a bonification, only to a reduction of annulation of the tax increase due to the lack or insufficient tax prepayments.  For a Belgian company, where the financial year corresponds to the calendar year, the ultimate dates for the tax prepayments and related tax credits are as follows:

As such, the decision to make (a) corporate income tax prepayment(s) is more a financial than a tax decision. We can illustrate this with a few examples:

• A Belgian company, with no dividend distribution during 12 March and 31 December 2020, can avoid the tax increase of 6,75% on its initial (estimated) tax liability during financial year 2020, when it pays:
  • Either 75% of its estimated tax liability prior to 14 April 2020 (tax prepayment 1)
  • Alternatively, 90% of its estimated tax liability prior to 10 July 2020 (tax prepayment 2)
  • Alternatively,100% of its estimated tax liability prior to 12 October 2020 (tax prepayment 3)
• A Belgian company, which distributes a dividend during 12 March and 31 December 2020, can avoid the tax increase of 6,75% on its initial (estimated) tax liability during financial year 2020, when it pays:
  • Either 75% of its estimated tax liability prior to 14 April 2020 (tax prepayment 1)
  • Alternatively, 90% of its estimated tax liability prior to 10 July 2020 (tax prepayment 2)
  • Alternatively, 25% of its estimated tax liability prior to each quarterly prepayment due date

Timely corporate tax prepayments can weigh hard on a company’s cash flow when the taxable result is likely to be negatively impacted due the uncertain economic circumstances resulting from this COVID-19 crisis

As the current COVID-19 crisis, especially for those companies that are most affected by the lock down/soft closing measures imposed by the Government, may prove to have a significant impact on the financial results for 2020 of many Belgian corporations, it is clear that “cash will be king” for the next months.  As a result, many companies may seek to solutions where they can minimize “cash out” transactions, including looking into postponing any corporate income prepayments and/or reducing the amount of corporate income tax prepayments.  With the potential negative consequence that a (partial) tax increase of (maximum) 6,75% may arise on the initial tax liability for 2020.

As a consequence, in view of the fast approaching due date for performing a tax prepayment (due by 14 April 2020), which gives rise to the highest tax credit to offset the tax increase for insufficient corporate income tax prepayments, most Belgian companies may be willing to postpone to make a tax prepayment until later in the year 2020, when they may have a more clear view on their expected taxable profits, or may look into ways to (significantly) reduce the amount of corporate tax prepayment(s) to be made in order to avoid such tax increase of (maximum) 6,75%.

A tax shelter investment as a pragmatic solution to (i) postpone the timing for corporate income tax prepayments and/or to (ii) reduce the amount of corporate income tax prepayments and, hence, preserving the cash in the company

Reducing the cash out payments

If a Belgian company has not enough cash to make sufficient and timely corporate income tax prepayments or prefers to preserve the cash as much as possible in the company, it could envisage to engage in a tax shelter investment with a recognized producer of audiovisual works or stage producer. The Belgian tax shelter regime, which provides for a tax exemption of 421% (figure for financial year 2020) when certain conditions and requirements are met, is to be considered as “an alternative” to settle a Belgian company’s corporate income tax liability.  When engaging into a tax shelter investment during the financial year 2020, a Belgian company can hereby significantly reduce its corporate tax liability for 2020 and, hence, also the amount of corporate income tax prepayment(s) during the financial year in view of avoiding the (maximum) tax increase of 6,75%. 

Indeed, when an optimal tax shelter investment is realized for the financial year 2020, in stead of performing a corporate income tax prepayment of 75% of the initial estimated tax charge by no later than 12 April 2020 as a so-called “tax prepayment 1”, only a tax prepayment in the first quarter of 45% of the expected tax debt would be sufficient to avoid a tax increase due to the lack or insufficient corporate tax prepayment.

Whilst many Belgian corporations are currently amid the COVID-19 crisis, with no clear view on how long such crisis will last and what the economic/financial impact on companies could be, they could prefer not to make a corporate income tax prepayment of the first quarter of 2020 and to postpone such payment until the due date for the second quarter (i.e. by 10 July 2020).  If a Belgian company performs a tax prepayment in the second quarter, this prepayment should -in combination with an optimal tax shelter investment- only amount to 56% of the expected tax liability for 2020 to avoid a tax increasement (rather than 90% to avoid a tax increase, if no such tax shelter investment is realized).

Postponing the cash out payments

In addition, signing a framework agreement for such tax shelter investment with such recognized producer can be signed until the last day of the financial year and, hence, postponed until the end of the financial year (e.g. in the course of December 2020), while the legal ultimate due date for making the payment of the tax shelter investment is set to be no later than three months after signing the framework agreement relating to such tax shelter investment.  E.g.: for a framework agreement for a tax shelter investment that is signed on 20 December 2020, the tax shelter investment amount should only be paid to the recognized producer by no later than 20 March 2021, resulting in a significant delay of the cash out for making both the tax prepayments and tax shelter investment.

Conclusion/recommendation

Belgian companies facing temporary cash problems as a result of this COVID-19 crisis or wishing to preserve as much as possible the liquidity in the company, could opt to combine the tax prepayments with a tax shelter investment. The main advantage of this combination is that a company can already perform a lower tax prepayment with the available cash to ensure that it will not suffer a tax increase for insufficient tax prepayments. At a later moment in the year, when a more clear view arises in the aftermath of this Corona crisis, the company can then decide to engage into a tax shelter investment (by no later than the end of its financial year (2020)), which will provide for a tax advantage linked to such tax shelter investment of 5,25% of the amount invested via the tax shelter regime (for 2020, for companies subject to the corporate tax rate of 25%; potentially increased with an additional financial return).

Grant Thornton can assist your company, based on the estimated corporate income tax liability for the financial year 2020 which potentially may be significantly impacted by the COVID-19 crisis, to simulate the optimal combination between corporate income tax prepayments and tax shelter investment, in view of postponing and reducing as much as possible the cash out.