Belgium introduces the tax free “recovery reserve” in response to the COVID-19 pandemic
Following the introduction of the one-off carry-back of tax losses, Belgium has recently introduced a complementary measure intended to strengthen the solvency and cash-flow position of Belgian companies that have suffered a loss pursuant to the COVID-19 pandemic.
This new measure allows companies to allocate part of their profit realized in a financial year (FY) linked to tax assessment years 2022, 2023 or 2024 to a so-called “recovery reserve”. This recovery reserve will boost companies’ equity levels and will remain temporarily exempt from tax, as long as certain conditions are fulfilled.
All Belgium-based (group) companies and permanent establishments of foreign companies are entitled to constitute such tax-exempt recovery reserve (gradually) during the 2022-2024 assessment years. The following companies are however excluded:
- companies that are not subject to the ordinary corporate income tax regime (e.g. investment funds);
- companies making payments of at least EUR100.000 to one or more entities established in a tax haven country, between 12 March 2020 and until the last day of the FY a company benefits from the recovery reserve, unless it can be proven that all these payments relate to bona fide business transactions;
- companies holding a direct participation in a company established in a tax haven country, between 12 March 2020 and until the last day of the FY a company benefits from the recovery reserve (non-rebuttable);
- companies who have distributed dividends, redeemed their own shares or repaid their capital/equity between 12 March 2020 and the day of submission of the relevant corporate income tax return constituting the recovery reserve;
- companies already in distress at the date of 18 March 2020 (meaning inter alia companies subject to a bankruptcy or judicial reorganization procedure or dissolved companies in a state of liquidation).
The tax free recovery reserve can only be constituted up to a total amount of the Belgian accounting loss registered during the COVID-19 FY, capped at EUR20m.
The loss that will be taken into account is the accounting loss incurred by that company during the FY that was or will be closed in 2020. For companies having their FY closing’s date between 1 January and 31 July 2020, the legislator has introduced the possibility to opt for the FY ending in 2021 to be their COVID-19 FY for the purposes of this measure. Companies that realized a profit in the COVID-19 FY, are thus also excluded from this measure.
Constitution and maintenance of the tax-exempt recovery reserve
The tax exemption of the recovery reserve is subject to the so-called “intangibility condition”, which essentially means that the eligible amount of the reserve is maintained on one or more separate “reserve” accounts of the annual accounts of the company.
The sole fact that the intangibility condition is fulfilled will, however, not preclude the (partial) loss of the tax exemption. The legislator explicitly enumerates some cases in which a recovery reserve may become taxable, even though it is maintained on a separate “reserve” account:
(i) when the company acquires an equity interest in or makes payments exceeding EUR100,000 to a company established in a tax haven country (cfr. supra), in which case the recovery reserve will become fully taxable;
(ii) when the company distributes dividends, redeems its own shares or repays its capital/equity, in which case an amount equal to the amount of the distribution will become taxable;
(iii) when in a given FY the personnel costs registered in the annual accounts of the company is substantially lower compared to the personnel cost registered in the FY preceding the COVID-19 FY.
The personnel cost is substantially lower if it is inferior to 85% of the personnel cost registered in the pre-COVID-19 FY.
If, for instance, the personnel cost dropped to 80% of the cost in the pre-COVID-19 FY, the tax exempt recovery reserve would be reduced with an amount equal to the difference between 85% and 80% of the personnel cost, which would lead to the (partial) taxation of the recovery reserve.
Example: the company registered a personnel cost of EUR100.000 in its 2019 FY. In the 2022 FY, it will register only EUR80.000 of personnel costs, which is EUR5.000 less than the limit of 85% of the 2019 personnel cost (100.000 x 85 % = 85,000). The tax exemption obtained through the – in the meantime - implemented recovery reserve must then be taken back up to an amount of that EUR5.000 difference. Suppose that the same company registers only EUR70.000 personnel costs in its 2023 FY; that is a further EUR10.000 less than the EUR80.000 of the previous FY. The exemption would then have to be taken back by a further EUR10.000 for that FY.
It should be noted that the amounts of the recovery reserve that have become taxable following these corrections, will still have to be taken into account for the calculations to examine whether the applicable cap is exceeded or not.
If none of the abovementioned cases occur, the recovery reserve will only become taxable upon liquidation of the company, assuming that the intangibility condition remains fulfilled.
Companies that want to apply this tax exemption will have to fill out a special form together with their corporate income tax return in the year of constitution of the recovery reserve, the model of which is still to be determined by a Royal Decree.
Belgian companies and permanent establishments that have suffered a loss in their COVID-19 FY, but expect to make profits in the future years may consider to convert these profits into a tax-exempt recovery reserve up to the amount of the loss suffered (and a cap of EUR20 million) in order to rebuild their equity levels.
However, the constitution of such recovery reserve should be considered on a case-by-case basis, given the fact that this measure only aims to postpone the tax bill. If, for instance, a company has significant amounts of tax deductible features (for instance dividends received deduction or tax losses) in order to offset its future taxable profits, and it wants to make profit and/or equity distributions in the near future it will probably not be a good idea to implement this measure.
For more information on the recovery reserve, please contact the authors or your usual DLA Piper tax advisor.