On 1 July 2020, the law on the temporary tax exemption of profits in anticipation of tax losses realized in the COVID-19 period (the so-called tax loss “carry-back” system) was published in the Belgian Official Gazette. The new law aims to strengthen the liquidity and solvency of companies that were in a sound condition but are temporarily experiencing liquidity problems because of the COVID-19 pandemic or because of other reasons.
What?
The tax loss “carry-back” measure enables Belgian companies (and Belgian establishments of foreign companies) expecting (current-year) tax losses for financial year 2020 (or financial year 2021) (the “COVID-year”) to offset these tax losses against the taxable profit for financial year 2019 (or financial year 2020) (the “pre-COVID year”), provided that certain conditions have been met. This means an anticipated use of tax losses, and hence a cash benefit for companies. The law does not require that the current-year tax losses are necessarily the result of the COVID pandemic. Also tax losses incurred for other reasons (e.g. as a result of new investments) are valid tax losses for this “carry-back” system.
This system allows companies to temporarily exempt part of their taxable profit of the pre-COVID year (corresponding to accounting years ended in the period between 13 March 2019 and 31 December 2020), by the creation of a so-called “carry-back” reserve. The tax-exempt “carry-back” reserve becomes taxable in the taxable period following the taxable period in which it was created, being the COVID-year.
The “carry-back” reserve may only be created during one taxable period.
Maximum amount
The maximum amount of the “carry-back” reserve is limited to the result of the financial year (without considering the impact of the temporary exemption itself), with corrections for dividend income that can benefit from dividends-received-deduction, innovation income that can benefit from innovation income deduction and patent income that can benefit from patent income deduction. There is an absolute cap of EUR 20 million. As penalties will be imposed in case the “carry-back” reserve has been overestimated (a 10% tolerance applies), the amount is de facto limited to the expected tax loss of the COVID-year minus the rate arbitrage impact on the taxable result of the company in the COVID-year. The rate of this separate assessment varies between 2% and 40%.
Conditions
The system is subject to certain conditions, e.g. no application is possible for companies that have executed a reduction and/or a distribution of equity (including share buybacks, dividends distributions or capital reductions) in the period between 12 March 2020 and the date on which the tax return related to tax year 2021 is filed. Companies with a direct shareholding in a company located in a tax haven country and companies that have made payments to tax haven companies in this period are also excluded (unless these payments could be justified based on specific grounds). Certain companies that are not subject to the common Belgian tax regime are excluded, as well as companies which could be classified as a company in difficulties on 18 March 2020.
How to apply?
The application of this measure takes place via the tax return (or a request for modification of the tax return if the tax return was already filed in certain cases). Certain formalities should be fulfilled in order to apply this measure, such as the completion of the FORM 275 COV.
How can we help you?
We can help you with assessing whether your company/branch can benefit from this measure and what the potential cash tax benefit can be. We can also assist you with the calculations. Indeed, carefully calculating the amount of the “carry-back” reserve shall be very important, in order to limit or avoid the separate tax assessment. Also the impact on tax prepayments and potential refund of tax prepayments needs to be analysed as well as potential impact on thin cap rules and group contribution regime.
Furthermore, we can also help you in assessing the accounting impact, from a Belgian GAAP, as well as US GAAP or IFRS perspective.
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Any further questions? Don’t hesitate to reach out to Koen De Grave, Matthias Bastiaen or your regular PwC tax contact.
