To further support the liquidity of taxpayers and restore the solvency positions during and after the Covid-19 crisis, the Belgian parliament recently adopted two laws. The first law introduces a one-off “losses carry-back” regime (law of June 13, 2020, published in the Belgian official Gazette on July 1, 2020). A second one contains various other tax measures (law of July 15, 2020, published in the Belgian Official Gazette on July 23, 2020).
This article will provide an overview of the main relevant measures for companies.
Covid-19 Losses Carry-Back
The government has introduced a one-off possibility to carry-back the losses incurred during the Covid-19 crisis to compensate the taxable profits of the previous financial year.
Such a carry-back regime is a novelty, limited to one single application. Belgian corporate taxpayers (Belgian companies and taxable Belgian establishments of foreign companies) that expect tax losses in the so-called Covid-19 financial year may offset these losses against their taxable profit realized during the prior financial year (“pre-Covid-19 financial year”, which is a financial year ending between March 13, 2019 and July 31, 2020). The enterprise may improve its liquidity position and potentially obtain a reimbursement of tax (pre)payments made for the pre-Covid-19 financial year.
Who is Eligible?
An enterprise with activities in Belgium (Belgian companies, Belgian establishment of foreign companies) with a Belgian taxable profit for the pre-Covid-19 financial year could in principle apply the carry-back.
However, the following companies are excluded from the regime:
- companies that reduced their equity (such as dividend distribution, capital reduction, share buyback) in the period as of March 12, 2020 until the day of filing their tax year 2021 corporate income tax return;
- companies benefiting from a special tax regime (such as investment companies or companies subject to the tonnage tax regime);
- companies that hold a direct participation in a tax haven company at any time in the period as of March 12, 2020 until the day of filing their tax year 2021 corporate income tax return;
- companies that made payments exceeding 100,000 euros ($118,000) (aggregate amount, on a annual basis) to tax haven companies- in the period as of March 12, 2020 until the day of filing their tax year 2021 corporate income tax return, unless it is demonstrated that these payments are made in the framework of real and justified transactions that correspond to legitimate economical or financial needs;
- companies qualifying as “enterprise in difficulties” before Covid-19 started (i.e. before March 18, 2019). “Enterprise in difficulties” notably includes businesses having filed for a judicial reorganization or having their net equity reduced, because of losses, to an amount below half of their capital.
Amount of Losses
The regime targets any losses incurred in the Covid-19 financial year, irrespective of the origin of the losses (no condition of any direct link with the Covid-19 crisis).
Taxpayers can in principle freely estimate the amount of losses of their Covid-19 financial year that they would like to carry back on their profit of their prior financial year. However, the carry-back is subject to limitations:
- the amount cannot exceed the taxable result of pre-Covid-19 financial year, such taxable result being (i) the increase/decrease in retained earnings; (ii) added with the disallowed expenses and the distributed dividends; (iii) reduced with the tax-exempt dividends, the deductible innovation income and the deductible patent income;
- even if the taxable profit is higher, there is an absolute maximum of 20 million euros.
A penalty applies in case of overestimation of the losses by more than 10%. Hence, the losses estimation should be made cautiously and even conservatively in some cases.
When and How?
The corporate taxpayer can temporarily exempt whole or part of its taxable result of the pre-Covid-19 financial year, by creating a temporary tax-exempt reserve in its tax return:
- 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;
- 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.
As a result, the pre-Covid-19 financial year tax base is reduced, and the profit is shifted to the following year (Covid-19 financial year), where the carry-back amount will be added to the tax result (compensated with the losses incurred in the Covid-19 financial year).
Any taxes that were already (pre)paid for the pre-Covid-19 financial year can be claimed back through a specific procedure.
Because of the Belgian corporate tax reform generating a reduction of the statutory rate from 29.58% to 25% by tax year 2021, the regime includes a specific compensation mechanism to neutralize any rate benefit resulting from profit shifting to tax year 2021 benefiting from a lower corporate income tax rate.
It is recommended to remain cautious when claiming the application of this one-off carry-back regime:
- in case of an overestimation in the losses incurred during the Covid-19, as mentioned above, a penalty will be computed;
- such carry-back will interact with other rules generating limitations for companies, such as the earnings before interest, taxes, depreciation, and amortization (EBITDA) that is used for the interest deduction limitation and for the Belgian tax consolidation regime (“group contribution regime”);
- the carry-back regime may also have consequences on recent and future restructurings and M&A transactions, regarding the procedure, the benefit of the measure, and the exclusions which can induce limitations in operations.
Temporary and Partial Exemption of Payroll Tax
A temporary partial exemption of payroll tax is introduced to reduce the payroll expenses during the months of June, July and August. It applies only to companies that meet the following conditions:
- the employing company must have made use of the temporary unemployment regime during an uninterrupted period of at least 30 days between March 12, 2020 and May 31, 2020;
- the employing company may not have reduced its equity (e.g. dividend distribution, capital reduction, share buyback) in the period from March 12, 2020 to December 31, 2020;
- the employing company may neither hold a direct participation in a tax haven company nor make payments exceeding 100,000 euros (aggregate amount, on an annual basis) to tax haven companies in the period from March 12, 2020 to December 31, 2020.
The employing company has to withhold the payroll tax on the salary of the employee, but will not have to transfer to the tax authorities 50% of the difference between, on the one hand, the total amount of payroll tax due for each of the months June, July and August and, on the other hand, the total amount of payroll tax relating to the month of May. The exemption is applicable on the ordinary salary only, and after all other possible reductions (a combination is thus possible). The total of the exemption may not exceed 20 million euros.
As a result, this exemption becomes effective for qualifying companies only if the payroll tax amount of June/July/August is higher than the one of May (e.g. because payroll tax amount of May was lower due to temporary unemployment regime) and considering only the ordinary salaries (excluding e.g. holiday payments, severance payments, etc.) of employees (excluding the directors and self-employed persons).
The investment deduction is a tax deduction that comes on top of the amortization for some eligible assets, calculated as a percentage of the acquisition value of eligible assets. The base rate for small- and medium-sized enterprises (SMEs) is 8%. The corporate tax reform of 2017 increased the base percentage of the investment deduction to 20% for fixed assets acquired or created between January 1, 2018 and December 31, 2019.
To stimulate investments, the law provides for a temporary increase of the investment deduction up to 25% for fixed assets acquired or created between March 12, 2020 and December 31, 2020. In case of insufficient taxable profit, the investment deduction can usually be carried forward for one year; in support of the difficult year 2020, the law also introduce a specific two-year carry forward (instead of one year) for investments acquired or created in 2019.
Tax Shelter Investments
The tax shelter for investments increases the attractiveness of investments in SMEs for individuals by granting them a tax reduction on their investment while the SMEs benefit from an increased source of equity funding. The existing tax shelter for investments in start-ups and scale-ups is broadened. It targets capital increases between March 14, 2020 and December 31, 2020, fully paid up by December 31, 2020. The new measure applies not only to investments in a starter or scale-up, but to all SMEs that have suffered from the Covid-19 outbreak resulting in a decrease in turnover of at least 30% during the period of March 14 to April 30, 2020 compared to the same period in 2019.
With start-ups, comparison should be made with the projected turnover according to the financial plan and the effective turnover during the latter period. Some companies are excluded from this measure, e.g. companies holding a direct participation in a tax haven company as well as companies making certain payments to tax haven companies.
The total amount of invested capital via this measure may not exceed 250,000 euros and several conditions and formalities apply to the tax reduction.
Reception Costs Temporarily Fully Tax Deductible
In principle, reception expenses (i.e. expenses incurred in the context of external relations and welcoming third parties), are only tax deductible for 50%. To support the events sector, a full deduction is allowed for reception expenses made between June 8, 2020 and December 31, 2020.
Three value-added tax (VAT) changes are included in this package of measures.
- December VAT prepayment relief: taxable persons registered for VAT in Belgium usually must prepay the VAT due on their December transactions during the month of December. Taxable persons registered for VAT in Belgium are relieved from this prepayment in December 2020.
- No input VAT adjustments on computers given away for free to schools: taking into account the possibility that schools will have to close again this year due to the sanitary crisis and in order to allow the greatest number to follow online classes, the measure allows companies not to perform input VAT adjustments on computers given away for free to schools is extended until the end of 2020.
- Technical validation of the Royal Decree reducing the VAT rate on restaurant services: the King has the power to set and modify the VAT rates and their scope of application through a Royal Decree. A subsequent law must however validate this Royal Decree. By Royal Decree of June 8, 2020, the VAT rate applicable to restaurant services has been reduced, until the end of the year, to 6% (instead of 12%) and is also extended to the sole supply of non-alcoholic beverages in bars, restaurants and other establishments (instead of the normal VAT rate of 21% in principle applicable to alcoholic and non-alcoholic beverages supplied in the framework of restaurant services). By way of the Covid-19 law, the legislator validated the Royal Decree of June 8, 2020.
The Belgian government will set up long-term tax measures as part of the recovery plan.
One of them could be a specific “recovery reserve” measure that was part of the drafted bill implementing the carry-back regime. However, the parliament set the recovery reserve out of the law, postponing the vote on this measure to later because of its non-urgent character. Such reserve would allow companies, during three consecutive taxable periods relating to tax years 2022, 2023 and 2024, to exempt profits corresponding to the amount of losses they have incurred in 2020, under the conditions of maintaining their equity position as well as at least 85% of their existing employment spend.
The reserve is subject to the intangibility condition, meaning that the reserve becomes taxable when the reserve is reduced (e.g. by dividend distribution), or ultimately upon liquidation of the company. The same exclusion of companies as the one for the losses carry-back would apply.
Several laws have been enacted since the outbreak of the Covid-19 crisis: helping with the short-term cashflow has been the main aim. Following some base measures globally postponing payments, (temporary) profit shifting and cost exemptions are now approved. Companies can benefit from these measures, but not all companies. In particular, making operations on the company’s equity excludes companies from benefiting from these measures. Some restructurings should also be anticipated. Be aware of the right opportunities for companies subject to tax in Belgium.
Laurent Donnay de Casteau is a Partner, Lionel Wellekens is Counsel and Nawel Benaisa is an Associate at Advisius, Brussels. Advisius is a law firm specializing in tax.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.