Quite a mouthful for what is also known as Tax-related coronavirus reserve. But the full name – naturally – better captures the essence of this entirely new tax vehicle, which is designed to strengthen companies’ liquidity positions.
Only for corporation tax purposes
The operation of the COVID-19 tax reserve is set out in the version dated 6 May 2020 of the Decree on emergency measures relating to the coronavirus crisis. This will be enshrined in law at a later date, but we will have to wait until after Prinsjesdag for that. It will be incorporated into the 2021 tax plans.
We have already briefly described this reserve in our article Yet another batch of additional temporary emergency measures. We should note here that the reserve is only being introduced for corporation tax purposes. Sole traders and partners in a partnership or general partnership (VOF) cannot set aside the tax-related coronavirus reserve on their 2019 balance sheets.
Forms in 2019; release in 2020
The tax-related coronavirus reserve is set aside against the profit for 2019, so that it can be fully released back into taxable profit in 2020.
Without a coronavirus tax reserve, corporation tax must be paid on the 2019 profit. If a loss is subsequently incurred in 2020, this loss will be carried back to 2020, resulting in a (partial) refund of the corporation tax paid for 2019.
However, as loss set-off only takes place once the final corporation tax assessment has been issued, the refund resulting from loss set-off is delayed for a considerable period. This liquidity disadvantage is prevented by the tax-related COVID-19 reserve.
Size of the COVID-19 tax reserve
The maximum size of the tax-related COVID-19 reserve is clear. This is because the reserve cannot exceed the profit for 2019, excluding the tax-related COVID-19 reserve. Given the link to loss carry-forwards, this makes perfect sense.
The tax-related coronavirus reserve may not be set aside if no loss is expected for 2020. This is also a logical condition, but at the moment it is, of course, still quite difficult for many businesses to estimate whether they will make a loss over the whole of the 2020 financial year.
The next step is to determine which part of the loss is attributable to the coronavirus crisis. Only that part may be allocated to the tax coronavirus reserve. The decision cites as an example the loss caused by a shortfall in turnover resulting from coronavirus measures taken by the government.
Estimates
Quite a few estimates therefore need to be made in the context of the COVID-19 tax reserve. The decision makes no mention of how these estimates should be substantiated. We will therefore have to rely on the established rules for substantiating tax provisions.
The decision does, however, state that fraud, abuse and clearly improper use will be combated as far as possible.