Carry Back mechanism: no impact for the Tax Shelter for accounting periods ending December 2020

The legislator has defined a fiscal framework aimed at promoting the liquidity and solvency of companies in the context of the fight against the effects of the COVID-19.

The principle of Carry Back

Under the Act of 23rd June 2020 (amended by the Act of 15th July 2020, Heading 2, Section 7), the legislator has defined a fiscal framework aimed at promoting the liquidity and solvency of companies in the context of the fight against the economic effects of the COVID-19 pandemic.

Companies adversely affected by the COVID-19 pandemic now have the option, for the accounting period ending between 13th March 2019 and 31st July 2020 (2019 or 2020 tax years), to exempt all or part of their taxable base by applying the estimated loss during the subsequent period.

This is not a mechanism to defer tax losses to a subsequent accounting period, but an advance provision for future losses in order to exempt previous taxes (Carry Back).

The aim is to strengthen the solvency and equity capital of companies to help them through the COVID-19 pandemic.

Last update on : 21.11.2020

Form 275 COV needs to be attached to the tax return 

Using this mechanism does not imply any special accounting treatment. It is all about constituting a reserve that is temporarily exempt to be deducted from the total amount of taxable reserved profits at the closure of the tax year ending between 13th March 2019 and 31st July 2020.

This exemption is to be requested in the tax return via a form 275 COV to be attached to the return.

Last update on : 21.11.2020

Limited to periods ending on 31st July 2020

For a long period, discussions in parliament focused on periods ending on 31st December 2020. Finally, though, the cut-off point was set for accounting periods ending at the earliest on 13th March 2019 and at the latest of 31st July 2020.

In practical terms, therefore, it is not possible to claim this temporary profit exemption for the accounting period ending on 31st December 2020, by making an allowance for future losses at 31st December 2021.

Conversely, it is possible to exempt profits for the period ending on 31st December 2019 using anticipated losses for the period ending on 31st December 2020.

Last update on : 21.11.2020

Sanctions in the event of disproportionate usage 

It is not permitted to constitute a temporary immune reserve that might end up greater than the loss for the current period. A tolerance of 10% is provided to this end. Beyond that, sanctions will be applied (separate contribution). An absolute limit of 20,000,000 euros also applies.

Last update on : 21.11.2020

Is everyone entitled to this measure?

Some companies are excluded from this measure. These are companies, on the one hand, which between 12th March 2020 and the date their corporation tax return is lodged for the 2021 tax year, allocated or distributed a dividend, carried out an operation to reduce their capital or conducted a share buyback. On the other hand, investment companies, cooperative joint-ventures, certain shipping companies, as well as companies with a direct holding in a company incorporated in a “tax haven” or which make payments to “tax havens”, for which the total amount exceeds 100,000.00 euros during the tax period without being justified for economic or financial reasons, are also excluded from this regime, as are companies that were already in difficulty before the pandemic (considered as companies in difficulty as of 18/03/2020).

Last update on : 21.11.2020

Compatibility with the Tax Shelter?

The question to be asked is whether this measure still enables a Tax Shelter to be envisaged for this year-end?

The answer is ‘yes’. A company wishing to apply the carry back mechanism to anticipate a loss at 31st December 2021 on its profit at 31st December 2020 cannot use it because of the year-end cut-off date set at 31st July 2020.

This means that the Tax Shelter remains the preferred option for this company to reduce its taxes and to achieve a net return of 10%!

By contrast, if we take the example of a company that signed a framework agreement for a Tax Shelter investment in December 2019 (2020 tax year) and which forecasts a loss at 31st December 2020, this company has the option of using this loss to erase its tax base retroactively for 2019. As a result, the Tax Shelter investment of December 2019 cannot be used for the tax year 2020, but may be carried forward to subsequent periods in which a profit is recorded, within the limit of 4 consecutive tax years at the date of signing the framework agreement (31/12/2023 in the example above).

Last update on : 21.11.2020


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