The "Recovery Reserve" is Finally Adopted | Fieldfisher
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The "Recovery Reserve" is Finally Adopted



On 12 November 2020, the Belgian Parliament adopted a new measure to bolster the liquidity and restore the solvency of Belgian businesses in the current pandemic context: the so-called "recovery reserve".

Before its withdrawal, this measure was included in a draft law deposited on 5 June 2020 with the Parliament. We previously commented this draft law in an article for MNE Tax.

  Key features 

As a rule, Belgian companies and establishments of foreign companies (i.e. corporate taxpayers) are entitled to this measure. Corporate taxpayers that benefit from a specific tax regime (e.g. investment companies and funds) or companies "in distress" as at 18 March 2020 (i.e. subject to bankruptcy, judicial reorganization or dissolved company in state of liquidation) are excluded from the scope of this measure.  

The "recovery reserve" allows corporate taxpayers to (gradually) temporarily exempt taxable profits relating to tax years 2022, 2023 or 2024. The reserve cannot exceed the accounting loss (whether or not resulting from the pandemic crisis) of financial year 2020 (or 2021 for companies closing their financial year between 1 January and 31 July 2020) with an overall maximum amount of €20 million. In other words, corporate taxpayers closing financial year 2020 or 2021 with a profit cannot benefit from this measure.   

Technically, this measure  takes the form of a tax-free “recovery reserve” in the tax return, decreasing the taxable profit of tax year 2022, 2023 or 2024 to the same extent as the amount that is booked as reserve. 

Unlike carried forward tax losses, the "recovery reserve" is not subject to the limitation of the so-called "basket rule" (limitation of the deduction of losses when the taxable basis after the deduction of group contributions exceeds €1 million). In this respect, for tax years 2022, 2023 or 2024, it may be recommended to exempt taxable profits via a "recovery reserve" (i.e. exemption of the full amount of loss) rather than using carried forward tax losses relating to financial year 2020 (i.e. subject to the limitation of the "basket rule").

Furthermore, a specific accounting requirement is foreseen for the benefit of this measure: the “recovery reserve” is tax exempt to the extent and as long as it is recorded and maintained in a separate account of the corporate taxpayers’ books ("intangibility condition"). This means that the “recovery reserve” would become (partially) taxable if the intangibility condition is not met. 

Specific anti-abuse measure

To prevent “abuses”, the law excludes corporate taxpayers (i) linked to “tax havens” (i.e. companies making annual payments exceeding €100k to “tax havens” between 12 March 2020 and the end of its financial year, unless it is demonstrated that these payments have a business purpose; or companies holding interest in companies located in "tax havens") or (ii) performing equity distributions (i.e. dividend distribution, share buy-back or capital decrease) as of 12 March 2020 until the filing day of the tax return through which a "recovery reserve" is claimed.

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 such demonstration (i.e. 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 12 March 2020 and the day when the law will enter into force. Taxpayers may thus be barred from the benefit of this measure for decisions taken before its entry into force. In light of the principles applying under Belgian tax law, the validity of such a retroactive effect seems questionable.

Furthermore, although the intangibility condition is met, the "recovery reserve" becomes taxable to the extent that: 
•    corporate taxpayers reduce their salary costs below 85% of the amount recorded for financial year 2019; and 
•    corporate taxpayers perform equity distributions (i.e. dividend distribution, share buy-back or capital decrease).

Preliminary comments

This measure is more than welcome by many businesses heavily affected by the COVID-19 downturn.

However, it is recommended to remain cautious when claiming its application as it is uncertain how it will 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, please do not hesitate to Geoffroy Galéa and Alain Thilmany


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