In the beginning of the COVID-19 health crisis some measures were undertaken with an immediate short-term cash effect, such as the extension of the deadline for tax payments and filings.
Recently, as the COVID-19 health crisis appears to be under control, the attention of the Belgian government has been shifting towards measures aimed to cope with the related economic crisis. The measures currently on the table have a broader impact than just liquidity, but also focus on solvability.
Item #17: The carry-back of tax losses
On 18 June 2020, the Chamber has adopted a draft law containing the so-called ‘carry-back of tax losses’.
This new rule creates the opportunity for Belgian companies (and Belgian establishments of foreign companies) that expect current-year tax losses in a financial year ending between 13 March 2019 and 31 December 2020 to offset these losses against the taxable profit of the prior financial year.
Of course, there are numerous conditions and limitations. For example (not exhaustive), only companies which were not in distress before 18 March 2020 can benefit from these rules. As part of the broad political coalition supporting COVID-19 measures, there is also an exclusion for companies with participations in tax havens, companies who make payments exceeding EUR100k to tax havens (rebuttable) and companies that decided on dividend payments, capital reductions, share-buy backs in the period between 12 March 2020 and the day of filing their assessment year 2021 corporate income tax return. The tax-exempt reserve cannot exceed the taxable basis (after the first operation in the tax return) of the given year and has an overall maximum of EUR20mio.
As Belgian tax law was not yet familiar with the concept of a carry-back, the implementation of these rules leads to additional complexity.
Further, applying this provision will impact also other tax calculations, such as the 30% EBITDA interest limitation. Consequently, there is a strong need for a holistic overview which generally can only be achieved by detailed tax modelling.
From an M&A perspective, obviously this new carry-back tax-exempt reserve will be another item up for verification and will be added to the tax due diligence list. As regards the acquisition structuring, the most important is the impact on the 30% EBITDA interest limitation that needs to be (re-)calculated and the impossibility to decide on dividends, capital reductions or share-buy backs during a certain period.
For recently closed transactions, provisions in the SPA on the procedure and responsibility to prepare tax filings will need to be revisited, to check whether such a tax exempt reserve can be set-up and who will take the (cash) benefit thereof, especially as the tax effect is spread over a two year period.
A specific paragraph confirms that for tax neutral mergers and (partial) demergers the carry-back will follow the general rules.
While most companies have applied for the various COVID-19 measures available by now, we see that quite some groups still struggle to monitor closely their short-term (and certainly mid-term) cash position and are uncertain how to manage and optimise their situation to steer their company through this crisis in the best way possible. We have created an email platform (firstname.lastname@example.org) in order to give companies a sounding board in these challenging times.