CORPORATE GROUPS BETTER BE AWARE OF THESE TAX MATTERS THIS YEAR!
Our complex tax system today offers many opportunities, but unfortunately also a growing number of pitfalls. With a view to the annual filing of the corporate income tax return, we are pleased to offer you an overview of some frequently occurring tax issues for company groups.
Not only the approaching tax return requires your full attention. Your future tax policy, will have to allow for a tangle of tax regulations as well
TRANSFERRING PROFITS TO A LOSS-MAKING COMPANY (FISCAL CONSOLIDATION)
Perhaps you have already thought about applying a fiscal consolidation (or so-called ‘group contribution scheme’) within your corporate group. Are there loss-making companies that are directly related to profitable group entities for at least 5 years? Then the profitable company can make a contribution to the loss of a (direct) parent, subsidiary or sister company. This way you reduce the tax expense at group level. Be careful with reorganisations that occurred in recent years and that may have (unintentionally) ‘severed’ the link. Moreover, prepare the group contribution agreement in good time. You will need to add this to the corporate tax return.
INTEREST WILL SOMETIMES BE NOT FULLY DEDUCTIBLE
The recently introduced ‘thin capitalisation’ interest deduction limitation is also relevant for a group of companies. The deductibility of the (net) interest expense at group level is limited to a (high) cap of 3 million euros. However, this cap is divided among all group entities that were part of the group during the entire taxable period. If your group of companies includes 10 companies, each group entity will only be able to use an amount of EUR 300,000 in tax-deductible interest charges. Given the technicality of this tax measure, your corporate group will usually have a ‘renunciation agreement 275CRC’ signed by all the group companies concerned, in order to avoid any negative tax consequences (also to be added to the corporate tax return).
INCREASED FOCUS ON TAX LOSSES
Tax losses (and certain other tax deductions) can no longer be deducted from an increase in the taxable base as a result of tax audits when a penalising tax increase of at least 10% is imposed.
In other words, when the auditor adds a profit to your result, you often cannot offset it against existing losses. An annoying situation because you pay tax even though, on balance, you have made no profit in the company. Consequently, corrections usually result in a minimum taxable base, regardless of the amount of available tax losses. Although in case of good faith or matters of principle, the tax authorities could show some goodwill by waiving the 10% tax increase (resulting in the losses remaining deductible). In practice we find that this is often very difficult. For example, think of possible non-deductible reception costs, expenses of which the professional character is questioned, ‘excessive’ depreciations (due to a too short depreciation rhythm), but also transferred expenses that are not at arm’s length (e.g. deductibility of management fees by holding company). As a result, the annual filing of the corporate income tax return becomes more than ever a delicate and sometimes a strategic exercise.
Furthermore, beware of the limited deductibility of tax losses carried over in the case of large profits. The deduction is limited to 70% above an amount of 1 million euros of taxable profit. Consequently, 30% of the additional profit is always taxed at the standard rate of 25%. In practice, this mainly affects ‘project companies’ where the profit is only realised at the end of the project.
As of this tax year, losses suffered in a foreign establishment (branch or asset) are no longer deductible from the profits of your Belgian company. Only in the exceptional case that the activities abroad are discontinued, can you still use them. This also applies to losses (e.g. due to depreciation) of foreign real estate owned by a Belgian company. In any case, it reignites the debate as to whether it is still wise to purchase your foreign property through a Belgian company.
OPPORTUNITIES AND PITFALLS FOR ESTABLISHING TAX-FREE RESERVES AND PROVISIONS
A number of categories of tax-free reserves (such as the ‘investment reserve’) are now eligible for a concessionary rate of 15% upon spontaneous taxation. The rate even falls to 10% if you meet a reinvestment obligation.
Subsidy proceeds are eligible for a tax exemption under strict conditions. This is usually the case for regional subsidies for employment or innovation. European subsidies are usually not eligible. However, you should carefully check the conditions of the subsidy grant.
If you have built up a tax-free reserve following a tax shelter investment, for your tax return you should certainly take into account the impact of the tax rate changes that have been implemented in recent years for corporate income tax purposes.
Since the ‘Summer Tax Reform’ of 2018, the conditions for a tax-free creation of a provision are definitely something to take into account. There must be a legal or regulatory obligation or a contractual commitment. The deductibility of your provisions for major maintenance costs or provisions for bonus schemes therefore require your attention once again!
ARE YOU UP TO DATE WITH THE REFORMED CAR TAX?
As of 1 January 2020, the deductibility of car expenses, including fuel costs, must be determined according to the individual CO² emissions of the car in question. For some (false) plug-in hybrids, you may no longer take into account the CO² emissions according to the certificate of conformity. For fully electric cars, the increased deduction of 120% has been abolished. The multitude of possible deduction percentages leads to a heavy administrative calculation burden and forces companies with a large car pool to take a pragmatic approach.
With the objective of a ‘green car tax’, investments in publicly accessible charging stations will be encouraged from September 2021 via a tax deduction of 200% (and 150% after 2022). From 2026, new company cars will only be 100% deductible if they are completely emission-free (fully electric). This deduction will also be gradually reduced to 67,5% by 2031. For company cars that run on fossil fuels such as petrol or diesel, or plug-in hybrids, the tax deduction will decrease from 2023 to reach zero in 2028.
INCREASED FOCUS ON HOLDING COMPANY STRUCTURES
The taxation of holding companies has been tightened up several times in recent years. On the one hand, stricter requirements apply in the area of ‘economic substance’ for the application of the ‘dividends received deduction’ (DRD) or for the exemption from withholding tax on dividend payments to passive holding companies. In addition, intra-group invoices to holding companies may also have an impact on any subsequent tax-free capital relief. You will no doubt recall the pro rata rule for recharacterization of tax-exempt capital into taxable dividends.
The increased and stricter tax investigations on director’s fees also force companies to pay the necessary attention to well-substantiated service or director’s agreements. Provide documentary evidence to demonstrate the reality of the services provided. Moreover, the remuneration must always be at arm’s length.
OTHER FOCUS POINTS
The deductibility of depreciation on investments was restricted in two respects. (1) Degressive depreciation is no longer allowed, and in addition (2) SME companies are obliged to write off on a pro rata basis in the year of investment.
In addition to criminal fines, administrative fines (e.g. interest on withholding taxes, proportional VAT fines, etc.) are no longer deductible.
If your company anticipated a corona loss in 2020 in fiscal year 2019 through the creation of a temporary tax-free reserve (the so-called ‘carry back for corona losses’), you must neutralise the final loss in fiscal year 2020 through a reversal of this reserve. Any overestimation of this loss will be penalised with an additional assessment.
ANTICIPATE IN GOOD TIME FOR THE CURRENT FINANCIAL YEAR 2021
There are also a number of matters to consider when determining your company’s tax position for the current financial year 2021.
If your company incurred a loss in the last financial year 2020, but improvement is already on the horizon as of 2021, you can apply a so-called ‘rebuild reserve’ (in dutch: ‘wederopbouwreserve’) as of assessment year 2022. This corona measure was introduced for companies that have not paid out any dividends during the previous (corona) period, among other things. You will have to create a tax-free reserve for this purpose. Anticipate this in time with your advance payments.
In addition, investments made by small companies in the period between 12 March 2020 and 31 December 2022 still benefit from the increased ‘investment deduction’ of 25%.
There are many things to take into account when determining the tax position of your corporate group. Our corporate tax experts will be happy to review your tax return and address the many opportunities and pitfalls in a timely manner.