Loss carry-back regime
The Law of June 23, 2020 introduces an optional one-off carry back of the so-called "COVID-19 losses" for both Belgian corporate taxpayers (Belgian companies and taxable Belgian establishments of foreign companies) as well as Belgian individual entrepreneurs. The technical implementation of this regime is obviously different for corporate income tax and personal income tax. We will discuss below the carry-back regime that is introduced in corporate income tax.
Goal of the measure
This crisis measure allows taxpayers to speed up the use of their losses, by offsetting the (estimated) COVID-19 losses against taxable profits of the prior financial year, i.e. the "pre-COVID-19 year". The taxpayer will for one financial year, i.e. the pre-COVID-19 year, be able to temporarily exempt (part of) its taxable profit in the amount of the estimated COVID-19 losses. By doing so, the tax burden for the pre-COVID-19 year will be lower and any tax prepayments made in excess of this tax burden will be reimbursed. This will immediately improve the liquidity position of the Belgian taxpayer, as we understand that the Government will organize an expeditious procedure for such reimbursement.
Available for all (estimated) losses…
Even though the intent of the legislator is to allow such relief for COVID-19 losses specifically, there is no explicit prerequisite or condition for the taxpayer to demonstrate the link between the losses and the COVID-19 crisis (whereas the first draft of bill originally still contained such an implied condition). Therefore, the carry-back regime can be applied with respect to losses even if they are not directly linked to the COVID-19 crisis.
… in a "COVID-19 year"
The loss carry-back can only apply with respect to the potential or estimated losses of the so-called "COVID-19 year", which is determined by law to be the first financial year that follows the pre-COVID-19 year, i.e. the financial year that ends between March 13, 2019 and December 31, 2020, (i.e. tax year 2019, 2020 or 2021 depending of the financial year).
Limited to one taxable period
As a result of the above-mentioned extension to December 31, 2020 of the period in which the pre-COVID-19 year needs to end, virtually all taxpayers can choose to apply the carry-back with respect to more than one financial year. The Law explicitly states, however, that the taxpayer has to choose and apply the carry back with respect to the losses of one financial year alone and has to offset these with the positive tax base of the immediately preceding financial year.
Tax-exempt reserve in pre-COVID-19 year in the amount of estimated COVID-19 losses
Technically, the carry-back will take the form of a temporary tax-exempt reserve that is to be included in the tax return covering the pre-COVID-19 year and that will reduce the amount of taxable profit for that year (new Article 194septies/1 (para 4) of the Belgian Income Tax Code ("BITC")).
This tax-exempt reserve will be based on the amount of estimated losses in the COVID-19 year. Taxpayers can hence in principle freely estimate the amount of profit that they would like to exempt by way of a tax-exempt reserve. Given that a penalty applies in case of overestimation of the losses with more than 10%, such estimation should, however, be made consciously and even conservatively in some cases.
The amount of the tax-exempt reserve is limited to the taxable result of the pre-COVID-19 year (not taking into account the tax-exempt reserve), with an absolute maximum of EUR 20 million.
Full reversal of the tax-exempt reserve in the COVID-19 year
The tax-exempt reserve will need to be entirely reversed in the tax return covering the immediate following year (i.e., the COVID-19 year) so that it is entirely included in the taxable result of that year and can be offset with the actual loss incurred.
Increase of the taxable base in the COVID-19 year
The carry-back measure is meant to be a budget neutral measure. Therefore, the legislator wanted to neutralize a difference in corporate income tax rates that might occur in situations where the COVID-19 loss was incurred in a tax year with a lower tax rate than the pre-COVID-19 year (following the decrease in corporate income tax rates as a result of the corporate income tax reform). New Article 185 para 5 BITC therefore fully neutralizes the advantage of using the losses in a preceding year during which a higher corporate income tax rate applied. This is done by way of an increase of the taxable base in the year in which the tax-exempt reserve is reversed (i.e. the COVID-19 year). This increase amounts to:
- 14.91% of the tax-exempt reserve in situations where the corporate income tax rate of the pre-COVID-19 year is 33.99% and the corporate income tax rate of the COVID-19 year is 29.58% (i.e. a difference in rate of 4.41% which is neutralized by increasing the taxable base with 14.91% (14.91% X 29.58% = 4.41%).
- 18.32% of the tax-exempt reserve in situations where the corporate income tax rate of the pre-COVID-19 year is 29.58% and the corporate income tax rate of the COVID-19 year is 25% (i.e. a difference in rate of 4.58% which is neutralized by increasing the taxable base with 18.32% (18.32% X 25% = 4.58%).
For a practical example of the calculation of the increase, see further below.
Penalty in case of overestimation of COVID-19 losses with more than 10%
In order to make sure that taxpayers align as much as possible the amount of the tax-exempt reserve with the amount of actual loss incurred in the COVID-19 year, a penalty is introduced if the amount of tax-exempt reserve is overestimated with more than 10%. This penalty takes the form of a separate surtax that is levied in the COVID-19 year and is calculated on the basis of the following formula:
Surtax base: COVID-19 year CIT rate x (the positive result of the COVID-19 year – 10% of the COVID-19 loss incurred)
*This rate cannot be lower than 2% or higher than 40%.
For a practical example of the calculation of the separate surtax, see further below.
How to apply for the loss carry-back
If the corporate income tax return covering the pre-COVID-19 year is not yet filed, taxpayers can immediately request the application of the loss carry-back regime in their corporate income tax return. The corporate income tax return form for tax year 2020 that was published in the Official Journal of June 29, 2020 provides for a separate code to include the tax-exempt reserve (code n° 1128). A separate form, which is still to be determined by Royal Decree (form n° 275 COV), should also be attached to the tax return.
If the tax return for the relevant pre-COVID-19 year was already filed, it is possible to request an amendment of the tax return by way of a specific procedure which is still to be determined by Royal Decree.
Finally, even if a tax assessment was already issued with respect to the relevant pre-COVID-19 year, it would be possible to claim the loss carry-back. While it is not entirely clear how one would need to do this, it would most likely be by way of the normal tax complaint procedure (it is settled case law that a taxpayer can file a tax complaint against its own tax return).
It should be noted that the loss carry-back measure is not available for the following taxpayers:
- Companies that benefit from a special Belgian corporate income tax regime (e.g. investment companies that are taxed on a reduced taxable base in accordance with Article 185bis BITC, companies subject to the tonnage tax regime, etc.).
- Companies that reduce their equity, e.g. by distributing a dividend, carrying out a capital decrease or carrying out a share buyback, in the period as of March 12, 2020 until the day the tax return with respect to tax year 2021 is filed.
- Companies that qualify as an enterprise in difficulties at the outset of the COVID-19 pandemic, i.e. on March 18, 2020. A definition of an 'enterprise in difficulties' can be found in Article 2, §1, 4°/2 BITC and this includes for example companies that have requested judicial reorganization and companies with net assets that are below half of their capital (i.e. when the corporate alarm bell procedure applies). The goal of this exclusion is to limit the benefit of this measure to companies that are structurally healthy and have only temporary liquidity issues due to the COVID-19 crisis.
- Companies that hold a direct participation in a tax haven company or that make payments in excess of 100 K EUR on an annual basis to such companies without being able to demonstrate that the payment corresponds to real and justified financial or business transactions (i.e. in line with the current reporting obligation of Article 307, §1/2 BITC), in the period as of March 12, 2020 until the day the tax return with respect to tax year 2021 is filed. The notion of 'tax haven' is defined in Article 307, §1/2 BITC and Article 179 of the Royal Decree executing the BITC ("RD/BITC") and includes countries such as Guernsey, Jersey, Monaco, UAE and others.
Impact of a corporate reorganization
The treatment of the tax-free reserve upon a corporate reorganization will depend on whether the transaction at hand meets the conditions for tax neutrality. If the entity applying the carry-back is involved in a tax-free a merger, the tax-free reserve will be transferred to the absorbing entity and the conditions will continue to apply as if that company had itself created the tax-free reserve. If the entity is involved in a tax-free demerger, the tax-free reserve will be allocated following the proportion of the fiscal net asset value of the assets transferred.
COVID-19 losses in FY 2020 are (substantially) higher than the estimated losses subject to the carry-back
COVID-19 losses in FY 2020 are lower than the estimated losses subject to the carry-back
COVID-19 losses in FY 2020 are equal to the estimated losses subject to the carry-back
The last example clearly demonstrates that it is not sufficient that the tax-exempt reserve and the loss of the COVID-19 year match perfectly in order to avoid the surtax if different corporate income tax rates apply in the COVID-19 year and the pre-COVID-19 year. After all, as a result of the increase in taxable base (which is higher than the 10% surtax tolerance in the case at hand), a surtax will in such case still apply. In order to avoid such surtax, one would have to take into account the increase in taxable base and hence limit the losses carried back.
As mentioned above, this measure was included in the draft bill but has ultimately not made it into the bill that was approved by the Belgian Parliament on June 18. It might nevertheless be picked up at a later stage when the Government considers more structural tax measures going forward. We therefore give you a brief overview of the most relevant implications of this measure below based on the draft bill that was available.
In a nutshell, this measure, which is optional, would allow corporate taxpayers to create a temporary tax-free reserve (wederopbouwreserve/la réserve de reconsitution) with respect to its financial years relating to tax years 2022, 2023 and 2024. Such a reserve will, provided the relevant conditions are met, reduce the taxable base of the company in that year and will hence ameliorate its solvency position.
Amount of the reconstitution reserve
The total amount of tax-free reconstitution reserve that can be created is the amount of the accounting loss of the financial year ending in 2020, with an absolute maximum of 20 million EUR. The amount of reconstitution reserve that can be created is also limited to the taxable profit of the company for the particular tax year in which the reserve is created (not taking into account the tax-free reserve itself). The reserve will need to be recorded in a separate account in the net equity of the company as recognized in its balance sheet and may not be distributed (i.e. the intangibility condition). The reserve will become taxable if and to the extent the intangibility condition would no longer be met.
As is the case for the carry-back regime, this measure would be excluded for companies that – in the period between 12 March 2020 until the date the tax return is filed for the tax year in which the reserve is created – benefit from a special Belgian corporate income tax regime, reduce their equity, hold a direct participation in a tax haven company or make payments in excess of EUR 100,000 to such tax haven company (the latter with the possibility of counterproof).
Impact of subsequent reductions of equity or payroll cost
If the company were to reduce its equity at a given moment, the amount of tax-free reconstitution reserve that was created in a prior year will, to the extent of such equity reduction, be included in the taxable profit of the relevant financial year. In the same line of thought, the reconstitution reserve will also become taxable if and to the extent that the company's employment cost decreases with more than 15% in comparison to financial year 2019.
What is still expected to come in the framework of COVID-19 (in a Belgian tax context)?
New draft bill with tax crisis measures
A new draft bill was introduced in the Belgian Parliament on June 25, 2020 with new tax support measures in the framework of the COVID-19 pandemic. This bill includes a partial exemption from wage withholding tax for the months June, July and August 2020 (for companies that used the regime of temporary unemployment for an uninterrupted period of at least 30 calendar days in the period between March 12, 2020 and May 31, 2020), an increase of the investment deduction to 25% for SMEs with respect to investments in fixed assets made in the period between March 12, 2020 and December 31, 2020, etc.
Package with structural measures
The current expectation is that the Belgian Government will, at a later stage, consider a more elaborate package with structural incentives and support measures for Belgian taxpayers. The hope is that companies that are not in a loss position as a result of the COVID-19 crisis but that nevertheless took a considerable hit as a result thereof will also be allowed to benefit from such measures, given that they are now de facto excluded from the above-mentioned loss carry-back and reconstitution reserve. At the same time the question also arises as to what compensating measures might be needed further down the line to cover the so-called COVID-19 budgetary hole. To be continued.
 This is the result after the so-called first operation (i.e. the increase or decrease in retained earnings, increased with the disallowed expenses and distributed dividends), reduced with (i) the dividend received deduction, (ii) the patent income deduction, and (iii) the innovation income deduction.
 Any changes to the financial year carried out as of May 15, 2020 will not have effect for the application of the carry-back measure.
Before the reform, the general corporate income tax rate was 33.99% (including 3% surcharge). This rate was in a first step decreased to 29.58% (including 2% surcharge) for financial years starting on or after January 1, 2018 if connected to tax year 2019. The rate was then further decreased to 25% for financial years starting on or after January 1, 2020 if connected to tax year 2021.
 To note that a specific formula applies in case the reduced corporate income tax rates for SMEs apply.
 Either 29.58% or 25% as the case may be.
 This is the result after the so-called first operation (i.e. the increase or decrease in retained earnings (including the increase as a result of the reversal of the COVID)19 tax-exempt reverse), increased with the disallowed expenses and distributed dividends), reduced with (i) the dividend received deduction, (ii) the patent income deduction, and (iii) the innovation income deduction.
 To note that, contrary to what is the case for the reporting obligation of Article 307, §1/2 BITC, such counterproof is not accepted in case a company holds a direct participation in a tax haven company.
 It appears from the report of the Commission of Finance that the non-urgent character of the measure was indeed one of the reasons not to include it in the bill that was approved in Parliament on June 18.
 An exception applies with respect to of financial years ending between January 1, 2020 and March 12, 2020 for which the accounting loss of the financial year ending in 2021 may be taken into account.