Carry back for companies
Under the carry back scheme (also known as loss relief or early loss deduction), companies can offset (possibly part of) their expected losses for the current financial year against a positive taxable result for the financial year ending between 13 March 2019 and 31 July 2020. In this way, the company can reduce or neutralise the cost of corporate income tax in these financially difficult times. While the scheme initially ran until 31 December 2020, the law of 15 July 2020 shortened this to 31 July 2020. As a result, the early loss deduction can only be applied in either the 2019 or 2020 assessment year, depending on the financial year’s closing date.
Companies that have already made advance payments for the financial year in question will be repaid the difference. To strengthen the cash position of such companies, FPS Finance will register corporate and non-resident (companies) tax returns that apply the carry back scheme in the course of October 2020, as long as these are submitted no later than 1 October 2020. That way, companies entitled to (possibly partial) reimbursement of advance payments may receive this repayment before the end of the year.
A company achieves EUR 250,000 as its tax result in the taxable period ending on 31 December 2019. For the current financial year ending on 31 December 2020, forecasts lead the company to expect a tax loss of EUR 100,000. In this case, the company can use the carry back scheme to create a temporary reserve of EUR 100,000 when it files its corporate tax return for the 2020 assessment year. This means it will only need to pay corporate income tax on EUR 150,000. If the company has already made advance payments based on an expected result of EUR 250,000, it will receive a portion of these payments in reimbursement. It is therefore in the company’s interest to submit its tax return no later than 1 October 2020.
How do you apply carry back when filing taxes?
In the corporate tax return/non-resident tax return (companies), include the expected loss as a temporarily exempted reserve for the final calculation under code 1128: “Reserves to improve solvency and equity as a result of the COVID-19 pandemic.” Include the same amount in the final calculation of taxed reserves as well, but as a negative number. To do so, we recommend using code 1011 PN: “Other taxable reserves.” You must also complete and submit the related 275 COV form. If you already filed a tax return before the law came into effect (11 July 2020), you may apply to the competent tax administration to amend your return. In that case, your company will have until 30 November 2020 to supply the competent administration with the 275 COV form.
The amount of the exempt reserve may not exceed EUR 20 million and is limited to the taxable profit, less DBI (dividend received deduction) and patent income/innovation deductions.
From an accounting point of view, the figures require no adjustment. However, applying the carry back scheme may result in an overvalued tax provision in the approved annual accounts, as the corporate income tax owed may well differ considerably after application of the carry back.
The created reserve must be reversed in the next taxable period (i.e. the year to which the expected losses relate). This positive movement in the taxable result is offset against the accounting loss. In addition, the company must include an additional disallowed expense (code 1266) to neutralise the effect of the rate drop in corporate income tax in assessment year 2021.
Finally, please be aware that there is no obligation to apply the carry back rule. Companies that do not wish to apply the measure can always offset tax losses against the taxable profit in future assessment years. After all, there is no time limit for the transfer of tax losses.
Penalty for excessive estimated losses
Companies that overestimate their expected losses will be penalised. If the estimate is revealed to exceed the actual losses by more than 10%, the taxes owed on the excessive portion will increase by between 2 and 40 percent. The tax increase is calculated according to the deviation between the estimated and actual losses and is not deductible.
We recommend applying the carry back rule only if you are certain that the company will finish the year at a loss and to be appropriately cautious in your estimate. Furthermore, remember to consider the impact on other tax adjustments, such as non-transferable tax deductions, the calculation of the group contribution, and the 50% tax shelter limit.
The explanatory memorandum to the carry back rule clarifies that the measure is intended for “(…) healthy companies with temporary liquidity problems as a result of the coronavirus epidemic.” Therefore, law excludes several types of companies, including:
Companies that decide to pay dividends (including liquidation bonus and liquidation reserve), reduce their capital or buy back shares in the period between 12 March 2020 and the submission date for the corporate tax return for the 2021 assessment year.
Investment companies and regulated real estate companies.
Companies that are affiliated with, or make payments to, companies in tax havens, unless these are demonstrably actual and honest transactions.
Companies that were already in difficulty before the COVID-19 pandemic; usually, such companies will not benefit from the measure in any case, as they are unlikely to have made a profit in the period between 13 March 2019 and 31 July 2020 and may already have carried forward past tax losses.
“A company may apply the carry back rule, but there is no obligation.”
Not applicable for…
Entrepreneurs already experiencing financial difficulties before 18 March 2020;
Taxpayers who wish to be taxed on flat-rate bases for the 2021 assessment year (2020 income year) (cf. Article 342, §1, second paragraph of the 1992 Income Tax Code).
When the carry back measure went into effect, the standard form for the personal income tax return for the 2020 assessment year had already been published. Therefore, anyone wishing to make use of the carry back must do so using a separate form (form 276 COV). Once a carry back has been requested, both the application and the amount are irrevocable and final.
“Companies that were already in difficulty before the COVID-19 pandemic are ineligible for the carry back.”
Do you have any questions about the carry back and its application? Are you looking for help with the analysis of your situation? If so, please do not hesitate to contact the specialists from our Tax team: firstname.lastname@example.org.