On 12 November 2020, the Belgian Parliament approved the implementation of the so-called “reconstitution reserve” in the Belgian Income Tax Code (“BITC”). After the “loss carry-back” mechanism (see our previous newsflash), this latest tax measure aims to bolster the liquidity and solvency of Belgian businesses in the wake of the COVID-19 pandemic.
• Mechanism: An Optional Tax-Exempt “Reconstitution Reserve”
Considering that several businesses are still recovering from the COVID-19 pandemic, the new measure allows Belgian corporate taxpayers to allocate part of their taxable income for the three forthcoming assessment years (2022-2023-2024) to a tax-exempt reconstitution reserve (BITC, Article 194quater/1, §1).
The bad news, however, is that this optional measure only postpones the taxable event. Eventually, the exempted amounts will be subject to Belgian corporate income tax (“CIT”). Therefore, corporate taxpayers with significant tax attributes (e.g., carried forward tax losses or dividend-received deduction) should consider sticking with the traditional Belgian CIT rules.
Still, there might be room for some tax planning. For instance, the reconstitution reserve is not subject to the so-called “Basket-Rule” (BITC, Article 207). Simply summarized, the Basket Rule puts a limit on the utilization of a list (“basket”) of tax attributes in any given tax year, whereby non-utilized amounts of tax attributes in the basket are carried forward to the subsequent tax years. A corporate taxpayer whose carried forward tax losses are limited under the Basket-Rule might consider deferring its taxable income by using the reconstitution reserve.
• Limitations: Corona-Losses and the 20 Million Cap
The BITC subjects the reconstitution reserve to a twofold limitation (BITC, Article 194quater/1, §3):
(i) The reconstitution reserve cannot exceed the losses booked during financial year 2020 (or 2021,
for corporate taxpayers closing their financial year between 1 January and 31 July 2020).
(ii) The reconstitution reserve cannot exceed EUR 20.000.000.
For example, if BelCo makes EUR 500.000 of losses in financial year 2020, the reconstitution reserve for assessment years 2022-2023-2024 cannot exceed EUR 500.000.
For those not familiar with the Belgian tax assessment process: a company closing it statutory book year on 31 December 2020, will be taxed on the income of that book year in tax assessment year 2021. Conversely, for a Belgian company closing its statutory book year on any other date of the calendar year, the year in which the end-date of the statutory book year occurs is the tax assessment year. For example, if a Belgian corporate taxpayer closes its statutory book year on 30 November 2020, the income of that book year will be taxed in tax assessment year 2020.
Also, the losses constitute an overall limit for the reserve. Therefore, if BelCo makes a EUR 400.000 loss for assessment year 2021, it will only have EUR 100.000 left for the two subsequent assessment years (2022-2023). Likewise, if BelCo incurs no losses (EUR 0) in financial year 2020, it cannot constitute any reserve at all.
• Requirements: Maintaining the Reserve, Equity and Employment Levels
The BITC requires all eligible corporate taxpayers to:
(i) Book and maintain the reconstitution reserve in a separate (non-distributable) account on the
liabilities’ side of their balance sheet (so called “intangibility condition”).
(ii) Maintain their equity position.
(iii) Maintain at least 85 per cent of their existing employment expenditure.
For example, assume BelCo has employment costs of EUR 100.000 for financial year 2020. If BelCo reduces its employment costs to EUR 70.000 for financial year 2021, it would be EUR 15.000 below the 85 per cent limit (100.000 x 85 % = 85.000). If BelCo created a reconstitution reserve, this EUR 15.000 difference would become taxable.
• Scope: Non-Eligible Taxpayers and Specific Anti-Abuse Provisions
Several Belgian corporate taxpayers are not eligible (BITC, art. 194quater/1, §2):
o Corporate taxpayers who reduce share capital/equity, buy-back shares or distribute dividends
between 12 March 2020 and the day they file their corporate tax return for assessment year 2021.
o Corporate taxpayers subject to a specific Belgian corporate tax regime (e.g., investment funds or
real estate investment corporations or REITs).
o Corporate taxpayers already in distress prior to 18 March 2020 (e.g., corporate taxpayers already
subject to a bankruptcy, a judicial reorganization, or in a state of liquidation).
o Corporate taxpayers, which between 12 March 2020 and the day they file their corporate tax
return for assessment year 2021, are linked with tax havens because they:
(i) Held a direct participation in an entity established in a tax haven (non-rebuttable presumption).
(ii) Paid at least EUR 100.000/year to an entity established in a tax haven (rebuttable presumption, if
the corporate taxpayer can prove that the payments relate to bona fide business transactions).
For further information, please contact Werner Heyvaert or Vicky Sheikh.