This factsheet is in pdf-format available.
Due to the coronavirus crisis, companies may incur a loss for the 2020 financial year. This loss can be set off against the profit for the 2019 financial year for the purposes of corporation tax. However, this will only take effect once the corporation tax assessment for 2020 has been finalised. The tax COVID-19 reserve can prevent the need to pay corporation tax for the 2019 financial year, which could otherwise only be reclaimed much later through loss set-off.
Only under corporation tax
The tax-related coronavirus reserve may only be set up under the Corporation Tax Act. Corporation tax is levied on (among others) public limited companies (NV) and private limited companies (BV), as well as on foundations and associations that operate a business.
The tax-related coronavirus reserve does not apply to businesses subject to income tax: sole traders, partnerships and general partnerships (VOFs).
Tax COVID-19 reserve (FCR)
The reserve is provided for in section 8.3 of the Decree on Tax Relief in Response to the Coronavirus Crisis (Decree on Emergency Measures relating to the Coronavirus Crisis) of 29 September 2020, No. 2020-19833[1].The 2021 Tax Plan bill sets out the statutory provisions governing the tax-related COVID-19 reserve.
How it works
The tax-related coronavirus reserve will be:
- charged to profit in 2019, and;
- must be fully released to profit in 2020.
The reserve may already be drawn upon by submitting a request for a reduction in the provisional corporation tax assessment for 2019. This allows the liquidity benefit to be realised quickly.
The reserve is included in the corporation tax return for 2019 and 2020 under the heading other tax reserves.
Size of the reserve
The size of the tax-related coronavirus reserve shall not exceed the lower of:
- the loss in 2020, but only insofar as this loss is related to the coronavirus;
- the profit for 2019, excluding the tax-related COVID-19 reserve (the tax-related COVID-19 reserve means that a loss cannot be recognised in 2019).
The loss is COVID-related insofar as it is linked to the COVID-19 crisis, for example insofar as the loss is caused by a fall in turnover resulting from the COVID-19 measures introduced by the government, whilst fixed costs continue to be incurred. If it subsequently transpires that the tax COVID-19 reserve was set at too high an amount, there is no legal obligation to rectify this.
The tax COVID-19 reserve may be set aside for an amount lower than the maximum. The decision to apply the COVID-19 reserve is made in the 2019 corporation tax return. This means that the decision can be made (and amended) no later than the date on which the final assessment becomes final.
Non-calendar financial year
Taxpayers with a non-calendar financial year may set aside the COVID-19 tax reserve in the final financial year ending within the period from 1 January 2019 to 31 March 2020 inclusive. The reserve must be recognised in full in the profit and loss account no later than the financial year following the financial year in which it was established.
How does the Tax and Customs Administration carry out its checks?
Like any tax reserve, the COVID-19 tax reserve must also be substantiated by the taxpayer. This means that an estimate must be made of the loss that will be incurred in 2020 and the proportion of that loss that can be classified as COVID-19-related.
Given the purpose of the approval, it stands to reason that the Tax and Customs Administration will carry out only a cursory check of the evidence supporting the tax-related COVID-19 reserve.
Cases of fraud, abuse and clearly improper use will, of course, be dealt with. Apart from these cases, the risk of administrative fines appears to be limited.
Pass-through of profit-related schemes
The decision explicitly states that the creation and release of the COVID-19 tax reserve have implications for the application of profit-dependent schemes under the Corporation Tax Act (no accompanying measures are being taken in this regard).
This concerns the following schemes:
- the subjective exemption for foundations and associations (with the risk of a final settlement for 2018) under Article 6 of the 1969 Corporation Tax Act;
- the earnings-tripping scheme under Section 15b of the 1969 Corporation Tax Act (a lower tax base means a lower interest deduction);
- discretionary depreciation on seagoing vessels (Article 11 of the Discretionary Depreciation Implementation Regulations);
- the charitable donation allowance, which is capped at 50% of the profit (Section 16 of the 1969 Corporation Tax Act).
Points to note
Finally, here are a number of points to bear in mind regarding the COVID-19 tax reserve:
- loss carry-forward: if losses from years prior to 2019 are at risk of being lost, this must be taken into account when determining the level of the reserve (the tax-related COVID-19 reserve may be set at an amount lower than the maximum);
- rate benefit: a limited rate benefit may be obtained (allocation in 2019 at 19% and release in 2020 at 16.5%);
- tax interest: during the period in which the tax interest rate has been reduced to 0.01%, the risk of an overestimated tax reserve relating to the coronavirus is limited[2];
- it has not (yet) been clarified how the COVID-19 tax reserve should be treated in the event of mergers, demergers, etc.;
- if a company joins a tax group during the financial year, an additional financial year is created, as a result of which the allocation to and release from the tax COVID-19 reserve may take place in the same financial year;
- It appears that the tax-related COVID-19 reserve can still be adjusted up to five years after the relevant financial year (via an ex officio reduction, with a voluntary additional assessment)[3].
Coronavirus measures
It is perhaps worth noting, though this may be superfluous, that it is not fiscally possible to recognise a normal provision in 2019. After all, as at 31 December 2019, not a single case of infection had yet been detected in the Netherlands. The global pandemic that subsequently emerged cannot be used to justify a provision.[4].
The purpose of this note is to outline a scheme. For the sake of readability, matters have therefore been simplified. VWG is therefore not liable for the consequences of actions taken or not taken as a result of this memorandum.
[1] And in the superseded versions of this decision of 16 June 2020, No. 2020-12560, and of 6 May 2020, No. 2020-9594.
[2] If, in retrospect, the allocation to the tax COVID-19 reserve is not (fully) accepted, there is a significant risk that tax interest will nevertheless be payable at an annual rate of 4%.
[3] An ex officio reduction cannot be used to rectify or review a decision taken previously.
[4] It is, incidentally, argued in the tax literature that there are indeed valid arguments in favour of setting aside a provision for the coronavirus.