Since the crisis, the economy has been performing much better. This has led to higher corporate profits. That makes it worth considering whether it would be advisable to dissolve the corporate tax group.
Dissolve a tax group
The corporate tax group can be dissolved by submitting a request to the Tax and Customs Administration. However, such a request may not have retroactive effect. The simplest way is to dissolve the group at the start of a financial year. If you dissolve the group during the financial year, interim balance sheets and profit and loss accounts must be prepared.
For most companies, the financial year coincides with the calendar year. The application to dissolve the fiscal unity with effect from 1 January 2018 must therefore be submitted to the Tax and Customs Administration before that date.
Why break up?
Corporation tax is levied at a rate of 25%. However, on the first €200,000 of the taxable amount, you pay “only” 20%. We call this the tiered pricing. By dissolving the fiscal unity and distributing the profit across several private limited companies, you can take advantage of the progressive tax rate several times over. This results in a saving on corporation tax.
Example
Suppose your holding company makes a profit of €75,000. The operating company’s profit amounts to €175,000. When combined within a tax group, the profit amounts to €250,000. The tax group is liable for €52,500 in corporation tax on this amount.
If the fiscal unity is dissolved, the holding company pays €15,000 (20% * €75,000) and the operating company pays €35,000 (20% * €175,000). The total amount of corporation tax will then be €50,000. Dissolving the tax group will result in an annual saving of €2,500 (5% * €50,000).
In addition to the tax rate advantage, dissolving the fiscal unity may offer an advantage in relation to the investment allowance. Furthermore, the joint and several liability of the individual companies for the tax owed by the fiscal unity ceases to apply.
REMEMBER: You must not distribute profits arbitrarily amongst your private limited companies. Such distribution must be based on commercial grounds.
Fare tier increased
For 2018, the corporate tax bracket threshold will be raised. The tax rates will remain unchanged. Your private limited company will then be liable for 20% corporate tax on the first €250,000 of its taxable income.
Do you expect the profits of your private limited company (or fiscal unit) for 2017 to exceed €200,000? If so, it may be worth looking into – or having someone look into – whether part of the profit can be carried forward to 2018. Of course, you must keep a close eye on the tax rules when doing so. The maximum benefit that can be achieved is 5% * €50,000 = €2,500.
A further increase in the tax bracket threshold is planned for 2020 (to €300,000) and for 2021 (to €350,000). Of course, we must make the reservation that the law may still be amended before then.
PLEASE NOTE!
Dissolving a corporate tax group can also have unexpected and unpleasant consequences. These include matters such as the revaluation of intercompany receivables and the retrospective taxation of book profits and reserves that have been transferred between the members of the tax group. It is therefore important to investigate (or have investigated) the potential implications before submitting the application to dissolve the tax group. VWGNijhof would be happy to assist you with this. Let the advisers to VWGNijhof help you determine the best approach in relation to (corporate) tax.
If in doubt: don’t overtake!