Carry-back for corona losses becomes a reality

How does the carry-back scheme work?

Compensation is made by creating a one-off, temporary, tax-exempt reserve in the taxable period that ends between 13 March 2019 and 31 December 2020. In concrete terms, this means that many companies will be able to choose between two financial years to which the early loss deduction can be applied.

An example. A company had a taxable profit of 100,000 euros in the 31/12/2019 financial year. Forecasts indicate that the 31/12/2020 financial year will close with a tax loss of 50,000 euros. In this case, a temporary tax-exempt reserve of 50,000 euros can be recorded in the corporate income tax return for the 2019 financial year. Corporate tax will therefore be payable on a result of 50,000 euros less in the 2019 financial year. A reimbursement of the advance payments may also be possible.

This tax-exempt reserve is, however, temporary and must be reversed in the following financial year. Thus, in reality, this carry-back postpones the tax payable for one year.

The carry-back loss settlement is not, incidentally, an obligation. The expected losses remain deductible from future profits for those who do not make use of this measure. And the measure is not only available to corporations, but also enterprises that perform independent activities in the capacity of a sole proprietorship or a liberal profession.

Practicalities

The reserve must be recorded under code 1128: ‘Reserve to strengthen solvency and equity as a result of the COVID-19 pandemic’. A corresponding 275 COV statement must additionally be submitted. If the corporate income tax return has already been filed, then this supplementary statement must be submitted by 30 November 2020 at the latest.

Limitations

As this measure stimulates company liquidity and solvency, the legislator has defined a number of strict conditions with respect to payments. The measure does not therefore apply:

• in the event that a dividend payment, capital reduction, share buyback or any other reduction or distribution of equity has taken place in the period from 12 March 2020 up to and including the day of tax return submission for the 2021 assessment year;
• for companies such as investment firms and regulated property firms, as well as companies with a participation in or that make payments to companies located in tax havens;
• for companies that were already qualified as a firm in difficulty on 18 March 2020.

Prudence required

A sanctioning mechanism was established to prevent companies from charging unrestricted estimated losses on the 2019 result. This is to the extent that forecast losses would greatly exceed the actual tax losses incurred at the end of the financial year. A separate assessment, which varies between 2 and 40 percent, applies in the event that the tax-exempt reserve is overestimated (incl. tolerance of 10 percent).