Belgium to introduce a loss carryback light and a tax-exempt reconstruction reserve to help business strengthen their liquidity and solvability

June 2, 2020 | Blog

The Belgian federal government has drafted emergency legislation to combat some of the difficulties businesses are experiencing in the wake of the lockdown and travel restrictions imposed during the COVID-19 pandemic.

Loss carry-back light

Corporations expecting to close the current taxable period with a loss are given the opportunity to carry back such loss to the preceding taxable period (ended between March 13, 2019 and March 12, 2020, the eve of the lockdown in Belgium). Corporations wishing to make use of this loss carry-back must estimate the loss of the current taxable period and can take it as an exceptional (one-off) deduction in their corporate tax return for the preceding tax period. For taxable periods ended between December 31, 2019 and March 12, 2020, the tax return must be filed in a few months, most likely by the end of September 2020.

To prevent abuse, a penalty will be applied if the estimated loss appears to be less than anticipated. The greater the overestimation of the loss, the higher the penalty (between 2 and 40%). The precise computation of the penalty is quite complex.

The carry-back is limited to the lower of:

  1. The corporation’s taxable income of the previous taxable period, deduction made of:
    1. Dividends qualifying for the participation exemption, and
    2. The so-called innovation-income.
      Following the advice of the Council of State of May 27, 2020, the patent income deduction will also be deducted from the corporation’s taxable base;
  2. 20 million euros.

In practice, the carry-back will lead to a lower amount of corporate income tax due for the preceding taxable period and unnecessary tax prepayments made during such period will be refunded to the taxpayer (improving its liquidity).

The carried back loss will be reversed in the subsequent (i.e., the current) taxable period. If the carried back loss was correctly computed, the reversed amount will be absorbed by the actual loss of the current taxable period and no corporate income tax will be due thereon.

Several technical measures are taken that go beyond the scope of this message. Certain types of corporations are not eligible for the loss carry-back, such as investment companies and companies enjoying the so-called tonnage tax. An important restriction is that corporations that are affiliated with or make payments to companies in tax haven jurisdictions are not entitled to make use of the loss carry-back. In the government’s initial law proposal it was required that taxpayers would demonstrate that the carried-back loss was caused by the COVID-19 pandemic, but following a remark from the Council of State, this requirement is scrapped.

The loss carry-back regime is optional and must be applied for when filing the relevant tax return and if such return has already been filed, a special declaration must be filed by November 30, 2020, supplementing the original tax return.

Reconstruction reserve

To prevent taxation of income earned in the three forthcoming years (2021-2022-2023) while corporations are still recovering from the COVID-19 pandemic, they will be allowed to constitute a tax-free reconstruction reserve. Again, this facility is limited to the lower of the tax loss of the current taxable period or 20 million euros. The reconstruction reserve must be booked in a separate non-distributable reserve account (on the liabilities’ side of the taxpayer’s balance sheet) and when the reserve is used to make profit distributions, it will become taxable.

Again, several types of corporate taxpayers are not eligible for this facility. It is especially noteworthy that corporate taxpayers, who distribute dividends, buy back shares or reduce share capital or are affiliated with tax haven companies, are out of scope of this facility, as are corporate taxpayers incurring no tax loss in the current taxable period.

Timing

It is expected that the Law Proposal will be amended in the course of this week to take into account the comments made by the Council of State. It will then be submitted to the House of Representatives – probably in the second or third week of June – and it is expected to be adopted by the House before the end of June.

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