Smiling financial man, reconstruction reserve companies, article 194quater/1 1992 CIR,

The exempt reconstruction reserve

In order to absorb the impact of the Covid-19 pandemic on the equity of companies and to restore their solvency, the reconstruction reserve was announced in the spring of 2020 as one of the measures to give companies more financial breathing space. Ultimately, the reserve was approved by the law of November 19, 2020, which introduced a new article 194quater/1 in the 1992 CIR

The reconstruction reserve offers companies the option, under certain conditions, to create an exempt reserve in the assessment years 2022, 2023 and / or 2024 up to the amount of the loss they incurred in the financial year ending in 2020 (in some cases, for the financial year that closes in 2021) with an absolute maximum of 20 million euros.

Which losses?

The reconstruction reserve is created on the basis of the business operating loss that was incurred in the financial year closed in 2020. There does not need to be a tax loss. It is irrelevant whether or not the losses were incurred as a result of the Covid pandemic.

Companies whose financial year closes between January 1, 2020 and July 31, 2020, have the choice to take into account the loss of the financial year closed in 2020 or that of the financial year closed in 2021.

Creation of the reserve

The reconstruction reserve is created per taxable period associated with the assessment years 2022, 2023 and/or 2024 to the amount of the taxable reserved profit before the reconstruction reserve is created.

Example: a company has an accounting loss of EUR 100.000 as at 31 December 2020. As from assessment year 2022 up to and including assessment year 2024, it can create a reconstruction reserve of a maximum of EUR 100,000 in function of its taxable reserved profit before the reconstruction reserve for the financial years 2021, 2022 and 2023.

The created reserve must further meet the "intangibility condition" and must be booked in one or more separate accounts on the liabilities’ side of the annual accounts.

Retention and reversal of the exemption

However, the created reconstruction reserve becomes taxable to the extent that the company makes distributions from its equity or when its employment level falls, and this at any time after the reconstruction reserve has been created. At the latest at the time of the liquidation of the company, the part of the reconstruction reserve that has not yet been taxed becomes taxable.

Equity distributions

Any distribution or allotment since the creation of the reconstruction reserve up to the liquidation of the company gives rise to a taxable reversal of the established reserve. More specifically, it concerns the following transactions:

Repurchase of own shares: reversal up to the value of the shares repurchased at the time of repurchase;
Allocation or distribution of dividends: reversal of the amount of the allocated or distributed dividend;
Capital decrease (including the repayment of locked-in reserves) or "any other decrease" in equity: reversal of the amount of the decrease; here "any other reduction" is broadly interpreted.

Decline in employment level

The personnel costs in the 62 account must be maintained at at least 85% of the amount in that account for the financial year that ended in 2019. If this is not the case, the difference between that 85% and the amount of the financial year concerned becomes taxable. The latter amount then becomes the new threshold value for the following fiscal years. The "remuneration test" must be done every year.

The taxable part of the reconstruction reserve can be offset against all tax deductions that the company would have at its disposal.

Which companies?

In principle, ALL companies that are subject to corporate tax or non-resident corporate tax are eligible. The measure is therefore not limited to SMEs. Obviously, the company must have incurred a loss in the "Covid year".
However, the following companies are excluded in any case:

Companies that were already in difficulties on March 18, 2020 (including companies in liquidation);
Companies that, in the period from March 12, 2020 up to the date of submission of their corporate income tax return in which the reserve is set up, have repurchased own shares, paid dividends, have implemented a capital reduction or have conducted any other reduction in capital or equity;
Investment companies, regulated real estate companies, cooperative private equity firms and shipping companies subject to tonnage tax;
Companies that have a direct participation in a company in a tax haven or that make payments to such companies of at least EUR 100,000 unless these payments meet legitimate financial or economic needs.

Concurrence with other favourable tax measures

The reconstruction reserve does not affect the tax losses incurred in the Covid year. It is not because these have (partly) been the subject of the reconstruction reserve that they are no longer tax-deductible.

Furthermore, the reserve can be created together with the application of the carry-back system of losses or with the system of fiscal consolidation.

On the other hand, it has a negative impact on the amount of the taxable retained profit, which means that it can influence the interest deduction limitation or the tax shelter for audio-visual works or stage productions as these are based / limited in function of the amount of the taxable retained profit..

Other formalities

For the tax years in which the exemption is applied, the company must add a form to its tax return that will be determined.

Conclusion

The introduction of the Reconstruction Reserve offers help to companies that have suffered business losses due to the Covid-19 pandemic and can provide financial breathing room.
However, there are many conditions attached to this and the remuneration test requires that it must be followed up annually..