The government wants to give companies much needed oxygen during this Corona crisis and help them to improve their liquidity and solvency. The new aid measure consists of a carry-back scheme or early loss deduction. The bill was approved [1] by the Parliamentary Committee on 15 June.

Fiscal aid measure

Originally, two new measures were tabled to enable companies to rebuild their equity as soon as possible. The only one that made it was the introduction of a general carry-back system. Companies will be able to deduct losses incurred in 2020 from profits made in 2019 through their corporate and personal income tax returns.

Initially, the bill also included the possibility of establishing a reconstruction reserve for the 2022, 2023 and 2024 financial years through a temporary exemption of (part of) the taxable reserved profits. However, as this measure focuses on the long term and covers several years, it was ultimately not adopted.

Carry-back system

Who qualifies?

The measure applies to both entrepreneurs/natural persons and companies.

How does it work?

The scheme offers the possibility to offset losses for the 2020 financial against taxable profits for the 2019 financial year. This results in a lower taxable base for the 2019 income year, which reduces the general tax burden.

Loss relief can be requested for the (expected) losses of the 2020 income year (tax year 2021). These losses can then be offset against the income of 2019 (tax year 2020).

The following year (income year 2020 - tax year 2021), the early deduction will be compensated by an addition to the profits or benefits.

This early loss relief is not automatic, but must be specifically requested by the taxpayer using a special application form.

A company wishing to apply the early loss relief scheme must provide an estimate of the losses expected for 2020. To avoid overestimation and excess use of the loss carry-forward scheme, a tax increase will be applied to the corresponding tax if the expected losses are overestimated by more than 10%.

For companies, the taxable period for which profits can be offset against subsequent losses is the financial year ending in the period from 13 March 2019 to 12 March 2020.

From a tax point of view, the expected loss for 2020 can be exempted through the tax return for the 2019 financial year by creating an exempt reserve. For companies with a financial year end at 31 December 2019 and companies that closed between 1 January 2020 and 12 March 2020, the compensation will be included in the tax return for the 2021 tax year through the reversal of a previously exempted reserve. This reversal can be offset against losses of the current financial year. For companies closing before 13 March 2019, the compensation will be included in the tax return for the 2020 tax year.

The legislator aims to regulate the offset of losses solely through the tax return. No accounting records are required.

Several conditions apply

• A maximum of 20 million euros can be offset, and the losses must be incurred as a result of the Corona crisis. At this point in time it is not yet clear how this link will have to be substantiated.
• Companies are also subject to several additional conditions. Any changes to the closing of the financial year since 15 May 2020 shall have no effect on the carry-back scheme and a correction shall be provided to prevent companies from benefiting from the different corporate income tax rates through the application of the early loss deduction.

The following companies are excluded

• Companies which, between 12 March 2020 and the date of filing the corporate income tax return for the 2021 tax year, have distributed dividends, repurchased their own shares, made a capital decrease or made any other reduction in equity capital;
• Investment companies;
• Companies subject to the tonnage tax;
• Companies directly related to companies in tax havens;
• Companies making payments to tax havens the total amount of which exceeds 100,000 euro during the taxable period (insofar as these payments cannot be economically or financially justified).

Vital oxygen

This support measure is undoubtedly more than welcome and provides companies with extra and much needed oxygen in these difficult economic times. However, it is extremely important to correctly estimate the expected losses in 2020 and thus avoid a tax increase. Moreover, a possible recalculation of the group contribution must also be taken into account.

[1] Bill containing fiscal provisions to promote the liquidity and solvency of companies in the context of combating the economic consequences of the COVID-19 pandemic (05/06/2020)