The reconstruction reserve: tax spearhead for the post-corona era
Mid November, Parliament approved measures which should allow companies to rebuild their financial reserves after the corona crisis. Do you keep your profit in the company, you can save quickly, but temporarily, some taxes.
Cash position versus long term
The measures which the governments in our country have taken, can be split up in two types. The first type are the measures destined to protect the cash position of companies during the lockdown period. E.g. payment delay for a number of taxes and social security contributions. Also, the loss carry back is such a measure since it allows postponing the taxes for 2019 until 2021. The new government now also starts with measures of the second type: the reconstruction after the corona crisis. These are a number of measures helping businesses to shift to business as usual as soon as possible. And as it is often the case, taxes are the preferred measures to realize this.
The big difference between these two types of measures is the period to which they apply. The cash position is an immediate and current problem which requires measures with instant effect. Mostly they have a short application period. Reconstruction is done in the long term. A typical consequence is that the measures of this last type will only come up to speed during the text years.
The reconstruction reserve is a measure of the second type. Its goal is to repair the creditworthiness of companies. Parliament wants to do this by allowing a 'reconstruction reserve' for three subsequent taxable periods relating to tax years 2022, 2023 or 2024.
So how does it work? Companies are stimulated, through tax measures, not to distribute their profits as from tax year 2022, but to keep them in the company in order to restore or improve its solvency.
It goes without saying that there are a number of conditions and exclusions:
The reconstruction reserve is subject to the untouchability conditions. This means that the reserved profit can in no way be distributed, since then it will become taxable;
Companies which as from 12 March 2020 performed a capital reduction or a purchase of own shares or distributed dividends, have no right to the reconstruction reserve;
Companies having links with tax havens are excluded. This concerns companies making payments to affiliated companies established in a tax haven;
Investment companies, regulated real estate companies and some other special company forms are excluded.
The reconstruction reserve is not unlimited.
The building-up of the reconstruction reserve is (for every tax year) limited to the taxable reserved profit for that taxable period determined before composing the exempt reserve. The maximum amount which can be exempt for a given accounting year equals the increase of the reserves, after positive and negative corrections of the start position of the reserves and before the reconstruction reserve.
The second and certainly the most important limitation: the maximum amount of the reconstruction reserve is limited to the (accounting) loss of the accounting year which closes in 2020 (companies closing their accounting year between 1 January and 30 June 2020 can opt for accounting year 2021). Imagine that the company closes with a loss of 100, the company can establish a reserve which in total is not higher than 100 ... and not 100 every year.
Finally, there is a third limitation: the reconstruction reserve can in no case be higher than 20 million euro.
These are the limitations ... you are not obliged to establish a reconstruction reserve if you do not want to, or to use to full amount. In case you have deductible donations, or exempt income, it is possible that it is better to use these deductions and exemptions, before you exempt the tax profit through the reconstruction reserve.
The established reserve will sooner or later become taxable. This is the case when the company purchases own shares (for the value of the purchase), distributes dividends (for the amount of the dividends) or makes a capital reduction (for the amount of the capital reduction).
Further, the tax exemption is linked to an employment condition. The employment is 'counted', not by counting the number of employees, but by looking at the payroll cost. The starting point is the amount in the accounting under '620 Remunerations and direct social benefits' in 2019. When the reconstruction allowance is established, it should every time be verified whether the amount of these remunerations in the year of establishment is not lower than 85% of the situation in 2019.
Imagine: the amount under '620 Remunerations and direct social benefits' in 2019 amounts to 100.000 euro. The starting point or threshold for the employment condition is 85.000 euro. In accounting year 2021, the company establishes a tax-exempt reserve of 200.000 euro. Accounting entry 620 still amounts to 100.000 euro.
For accounting year 2022, the amount decreases to 80.000 euro (which is lower than 85% of the 2019 amount). As a consequence, the reconstruction reserve established in 2021 will become taxable for an amount of 5.000 euro, which is the difference between accounting entry 620 in 2022 (80.000 euro) and the starting point (85.000 euro).
Imagine that in accounting year 2023 the payroll cost under 620 (and consequently the employment) further decreases to 70.000 euro, again 10.000 becomes taxable (starting point (85.000) minus the current value (70.000) of which 5.000 euro was already taxed).
The taxation cannot go 'further' than the amount of the reconstruction reserve: if the decrease in payroll cost is higher than the amount of the reconstruction reserve, the latter will become fully taxable, but no more than that.
The reserved profit becomes taxable as soon as you start distributing. Ultimately the tax which was not paid at the time, will become due at the moment of liquidation of the company.
The reconstruction reserve certainly holds possibilities for certain companies, but the conditions are strict and probably shareholders will not hang on that long. Companies which survived in 2020 (and did not suffer losses), cannot establish a tax-exempt reconstruction reserve.