Corporate tax reform: get prepared for the next phases
The next phases of the corporate tax reform will enter into force in tax years 2019 and 2020. We herewith remind you of the upcoming changes and advise how you can prepare for the application of the compensatory measures. By doing so, you will ease the impact of it.
Making a provision for risks and charges becomes more difficult
Making a tax free provision for risks and charges is as from tax year 2019 only possible when it relates to legal, contractual and/or regulatory obligations. This new approach applies to new provisions and to provisions added to existing provisions as from 2019.
Provisions voluntarily made by a company do not longer qualify, e.g. (in most cases) provisions for repair and maintenance. A possible solution can be to enter into an agreement with a contractor, leading to a contractual obligation.
Taxation of capital gains: invest otherwise
Capital gains on small participations (less than 10%, or acquisition value less than 2,5 million euro) will as from tax year 2019 be taxed at the standard corporate tax rate. For shares in investment funds the participation condition (minimum participation) and permanence condition (keeping the shares for at least one year uninterruptedly) do not apply. It is appropriate to revise your investments. Investing in a 'dividend received deduction' investment fund can be an interesting alternative.
Counter deduction limitation with tax credit for research and development
As from tax year 2020 the 'calculations' are being reformed. The use of some deductions is limited to 1 million euro, increased with 70% of the profit exceeding 1 million. Consequently 30% of the profit exceeding 1 million will always be taxed. This means that in practice there is a minimum taxation.
The deduction limitation applies to:
carried forward deductions following the dividends received deduction scheme;
carried-forward innovation deduction;
notional interest deduction of the financial year;
carried-forward notional interest deduction of previous financial years.
For other deductions (of the financial year itself) the deduction limitation does not apply.
Due to the deduction limitation (e.g. of previous losses) it could be interesting to transfer the investment deduction for research and development into a deductible tax credit. By doing so, the company can make better use of previous losses. In order to precisely know whether or not the company would benefit from this, both scenarios should be compared. An easy example to make this clear.
In 2019 NV INVEST has:
2,1 million € profit
3 million € previous losses
500.000 € investment deduction
there are no other deductions.
In case NV INVEST uses its investment deduction, the taxable profit will be reduced to 1,6 million € (2,1 million € profit - 0,5 million € investment deduction). This has an immediate impact on the usability of the previous losses. The first million can be fully used. From the remaining part of the losses, only 600.000 € (profit above one million) x 70% = 420.000 € is deductible. In total NV INVEST can use 1.420.000 € of its previous losses. This leads to a taxable result for NV INVEST of 180.000 € = 2,1 million € - 500.000 € investment deduction - 1.420.000 € previous losses. At a tax rate of 29,58% this comes down to a taxation of 53.244 €.
When NV INVEST would not use its investment deduction, but transfers it to a tax credit of 147.900 € (29,58% of 500.000 €), the situation is different. The usability of previous losses will be calculated at a higher amount: the first million can be fully used. From the remaining part of the losses, 1.100.000 € (profit above one million) x 70% = 770.000 € is deductible. This leads to a taxable result for NV INVEST of 2,1 million € - 1.770.000 € = 330.000 €. This leads to a tax amount of 29,58% = 97.614 €. However, this will be reduced to 0 since NV INVEST can use its tax credit. NV INVEST still keeps 50.286 € (147.900 € - 97.644 €) tax credit which can be carried forward to the coming years.