On 16 May 2020, after the first wave of supportive measures to mitigate the consequences of the COVID-19 crisis, the Council of Ministers adopted a draft law including new tax recovery measures. These provisions have as main aim to avoid a series of bankruptcies and to help companies to rebuild their liquidity and solvency positions.
The new measures include the following:
- For Belgian companies and permanent establishments:
- Temporary tax exemption of profits in anticipation of losses realized in the COVID-19 period;
- Introduction of a ”reconstitution” reserve;
- Entrepreneurs would benefit from a similar tax exemption of profits subject to different conditions compared to corporates.
Exemption to strengthen the solvency and the equity of companies (also called loss “carry-back” or “Reserve COVID-19”)
Under certain limits and conditions, companies that expect to incur losses during the COVID-19 pandemic period, would be entitled to claim a temporary exemption of all (or a part of) their taxable result of the financial year preceding this period (related to FY 2020 or FY 2021), up to the amount of such losses (other limitations apply).
This temporary exemption of profits would only be applicable to assessment years 2019 or 2020 (corresponding to accounting years ended in the period between 13 March 2019 and 12 March 2020) and would be granted through the creation of a temporary tax-exempt reserve to be deducted from the taxable reserves in that financial year.
This tax-exempt reserve would be reversed in the subsequent financial year, which is the financial year in which the losses have been incurred (“the COVID year”).
The maximum amount of the exemption would be limited to the amount of the result of the financial year (taxable result from the first operation not considering the impact of this temporary exemption itself and reduced by the dividends-received deduction and innovation income deduction) and would, in any case, be limited to 20 million EUR.
Certain companies would be excluded: (i) companies which have executed share buybacks, dividend distributions and/or capital reductions (ii) companies not subject to the common Belgian tax regime (iii) companies with a shareholding in a company located in a tax haven country and companies that have made payments to tax haven companies unless these payments can be justified based on specific grounds.
Finally, this carry back regime includes an anti-avoidance scheme in case the tax exempt reserves are overstated with more than 10 percent (compared to the actual loss) and/or in case rate arbitrage benefits would apply.
Specific procedures are in place to recover tax already paid or prepayments made in relation to the year in which the temporary exemption is claimed.
Also certain formalities will need to be applied to benefit from the measure.
This loss carry-back system will improve the cash flow of a number of companies, permanent establishments and entrepreneurs suffering economically from the COVID-19 pandemic. As anti-avoidance measures are embedded in this system, a proper implementation is however necessary to avoid unpleasant surprises afterwards.
The government also introduces a mid-term measure that aims to enable companies to gradually restore their solvency position going forward.
To that end, a tax-exempt reserve can be recognized by a company at the end of the taxable period relating to the assessment years 2022, 2023 and 2024.
The exemption would be granted up to a maximum amount equal to the Belgian accounting operating loss over the financial year 2020, capped at 20 million EUR. For each assessment year, the amount of the exemption that can be claimed would be limited to the increase of taxable reserves in the financial year without considering the impact of the booking of the ” reconstitution reserve” in application of this specific tax measure, up until the cap is reached.
Specific rules would apply for companies with a year-end closing between 1 January 2020 and 12 March 2020.
The scheme would hence only be available, depending on the financial year’s closing date, for companies that realize an operating loss for Belgian accounting purposes during either financial year 2020 (or financial year 2021, in specific circumstances).
The exemption would be subject to two conditions. The reserve would have to be recorded on one or more separate liabilities accounts and would be subject to the so-called intangibility condition. Moreover, it would not be available for companies with a shareholding in a company located in a tax haven country and companies that have made payments to tax haven companies unless these payments can be justified based on specific grounds (period between the 12 March 2020 and the end of the taxable period during which it benefits from the reconstitution reserve).
The “reconstitution reserve” would become partially or fully taxable in a given year to the extent the company would distribute dividends, execute share buy backs or make capital reductions or would in such year record material lower (“62 account”) salary, social liabilities and pension expenditures compared to the last financial year prior to the COVID-19 period (exceptions apply).
As for the loss carry back measure, similar companies are excluded from this measure. Companies that execute between 12 March 2020 and the date of filing of the tax return related to the financial year during which the reconstitution reserve is created a capital decrease, share buy back or dividend distribution are also not entitled to this measure.
Certain formalities will need to be applied to benefit from this measure.
Both measures are subject to change during the legislative process. If adopted, they would enter into force at the date of the publication of the law in the Official Gazette.
Our PwC tax experts are glad to assist you with regard to the above and to answer all your questions. Do not hesitate to contact your regular engagement team in case of any further questions.