These measures included two income tax measures that might be of particular importance for assessment periods 2019 to 2024: a one-off tax losses carryback and a “recovery reserve”.
On 18 June, the Parliament adopted the one-off tax losses carryback whereas the "recovery reserve" has been withdrawn. The one-off tax losses carryback is included in a Law of 23 June 2020 published in the Belgian State Gazette of 1 July 2020.
One-off tax losses carryback
According to this new rule, corporate taxpayers (as well as Belgian permanent establishments of foreign companies ; a similar measure is foreseen for individuals) would be allowed to offset the taxable profits relating to tax years 2019, 2020 or 2021 (corresponding to a financial year ending between 13 March 2019 and 31 December 2020) with estimated tax losses relating to the immediate following tax year, i.e. tax years 2020, 2021 or 2022 respectively. This measure can be applied only once.
In the original draft law, the possibility to deduct estimated losses was limited to losses relating to tax years 2020 and, to a limited extent, 2021 (only for companies having their financial year ending between 13 March 2019 and 12 March 2020). The reference period has been adapted and broadened to avoid situations where corporate taxpayers would not have been able to benefit from this measure due to the closing date of their financial year (e.g. companies closing their financial year on 31 March 2020 would not have been able to fiscally deduct their "pandemic" losses suffered as of April 2020 on their financial year 2019's tax result).
Companies qualifying as "enterprise in difficulties" on 18 March 2020 are excluded from the benefit of this measure. Defined under Belgian tax law, the notion of "enterprise in difficulties" notably includes businesses having filed for bankruptcy or, as a result of losses, having their net equity reduced to an amount less than half of the fixed part of the share capital.
Such carryback would result in a decrease of the corporate taxpayers’ tax charge for tax year 2019, 2020 or 2021 to the extent of the estimated tax losses deducted, implying that excessive tax prepayments would be reimbursed.
Hence, this rule should bolster Belgian corporate taxpayers’ liquidity.
Technically, this would take the form of a temporary tax-exempt reserve in the corporate income tax return, equal to the amount of estimated tax losses to carryback up to the result following the so-called “first operation” in the tax return less income received eligible to (i) the Belgian "participation exemption" regime (so-called "Dividend Received Deduction" or "DRD"), (ii) the "Innovation Income Deduction" ("IID") and (iii) the "Patent Income Deduction" ("PID"), with a maximum amount of €20m.
The following year, the tax-exempt reserve will be reversed and added back to the taxable basis in order to avoid a double deduction. A specific compensation mechanism is foreseen in order to avoid that companies use this reversal in order to benefit from the a reduced statutory rate (as from tax year 2021 the statutory rate will be reduced from 29.58% to 25%).
The words in italics are add-ons that were not included in the original draft law. With these add-ons, the lawmaker decided to reduce the benefit of this measure to the extent a company receives income eligible to the DRD, the IID or the PID.
The one-off tax losses carryback will not be subject to the limitation of the so-called "basket rule", whereas tax losses carried forward are (when the taxable base before the application of the "basket rule" is higher than €1m, the deductions included in the "basket" – such as the tax losses carried forward – are limited to €1m + 70% of the remaining taxable base).
As only estimated tax losses can be carried back, if such losses are overestimated by more than 10%, a specific (and rather technical) sanction is foreseen.
To prevent “abusive” claims of this regime, the law excludes companies subject to a specific corporate tax regime (e.g. investment companies); companies linked to “tax havens”, i.e.: companies making annual payments exceeding €100k to “tax havens” without business purpose; companies holding interest in companies located in “tax havens”; and companies performing equity distributions as of 12 March 2020, i.e., dividend distribution; share buy-back; or capital decrease.
The interaction of exclusions relating to "tax havens" is questionable. Indeed, it seems to exclude any companies holding interest in companies located in "taxFas far havens" without the possibility for them to demonstrate that these interest are justified by a business purpose whereas the exclusion concerning payments exceeding €100k allows a demonstration that these payments are made in the framework of real and sincere transactions that correspond to legitimate economical or financial needs. Hence, as pointed out by the Council of State, these two similar exclusions are treated differently and, hence, may lead to an unlawful discrimination.
Additionally, the exclusion relating to equity distribution may preclude taxpayers in financial difficulties on the sole basis that they have distributed equity as of 12 March 2020. This means that any distribution (whatever its amount) precludes a company from the benefit of this regime, even if this distribution has been performed between the 12 March 2020 and the day when the law enters into force. Taxpayers may thus be barred from the benefit of the carryback for decisions taken before its entry into force or even before the day when this regime has been first proposed by/to the Government. In light of the principles applying under Belgian tax law, the validity of such a retroactive effect seems questionable.
This measure is more than welcome by many businesses heavily affected by the COVID-19 downturn.
It is however recommended to remain cautious when claiming its application. Indeed, the one-off tax loss carryback measure is expected to interact with other rules.
For example, it could directly influence the “fiscal EBITDA” serving as the basis of the so-called “EBITDA rule” or the application of the Belgian tax consolidation regime (the so-called “group contribution regime”).
In case of questions in relation herewith, do not hesitate to contact us.
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