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Belgium to introduce tax loss carryback, recovery reserve in response to pandemic

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On 5 June, the Belgian government deposited with Parliament a draft law containing specific tax measures to bolster the liquidity and restore the solvency of Belgian businesses in the current COVID-19 context. 

These measures include 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”. 

These exceptional measures are expected to materially influence the income tax position of many Belgian businesses.

As these measures have just been deposited with the Belgian Parliament, they are still subject to parliamentary debates and, hence, may be (partially) amended or withdrawn. 

One-off tax losses carryback 

Under current legislation, tax losses can only be carried forward on future tax years. No carryback of such tax losses on previous tax years is currently permitted. 

The draft law contains a derogation to this principle as it introduces a one-off tax losses carryback rule.

According to this rule, corporate taxpayers (a similar measure is foreseen for individuals) would be allowed to deduct estimated tax losses relating to tax year 2020 (or 2021 for companies having their financial year ending between 13 March 2019 and 12 March 2020) on the taxable profits relating to tax year 2019 or 2020 respectively. 

Such carryback would result in a decrease of the corporate taxpayers’ tax charge for tax year 2019 or 2020 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 with a maximum amount of €20m. 

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 draft 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 "tax 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 draft law will enter 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 Governement. In light of the principles applying under Belgian tax law, the validity of such a retroactive effect seems questionable.

Recovery reserve

The draft law contains also a measure that should improve Belgian corporate taxpayers’ solvency position. This second measure would allow these taxpayers to temporarily exempt taxable profit relating to tax years 2022 to 2024. 

Technically, this would take the form of a tax-free “recovery reserve” in the tax return, decreasing the taxable profit of related tax years to the same extent. 

As a rule, this reserve could not exceed the accounting loss of financial year 2020 (or 2021 exclusively for companies closing their financial year between 1 January and 12 March 2020) with an overall maximum amount of €20m. 

Furthermore, this “recovery reserve” should be recorded and maintained in a separate account of the corporate taxpayers’ books (intangibility condition). 

This “recovery reserve” would become (partially) taxable if the intangibility condition is not complied with, if the corporate taxpayers materially reduce their salary costs. Additionally, the specific exclusions (see above) applicable to the one-off tax losses carryback would also apply to the “recovery reserve”. 

Welcome measures 

These measures are more than welcome by many businesses heavily affected by the COVID-19 downturn.

However, it is recommended to remain cautious when claiming their application. Indeed, these complex specific regimes are 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”). 

Abundans cautela non nocet ("abundant caution does no harm").

This article first appeared in MNE Tax, visit thier site.

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