The reconstruction reserve: tax relief for companies to rebuild their equity

The equity and solvability of many companies has been hit hard by the corona crisis. In its coalition agreement, the new federal government has announced the introduction of a ‘reconstruction reserve’ in order to let companies rebuild their equity in a tax advantageous way. For this, the government builds on an earlier law proposal which is pending in Parliament (see our earlier flash).

According to the new regime, companies will be able to exempt part of their profit for the taxable periods 2021, 2022 and 2023 (linked to assessment years 2022, 2023 and 2024) by recording that profit on an exempt ‘reconstruction reserve’.

In the pending proposal, the amount is limited by a double ceiling: the accounting loss of income year 2020 and an absolute maximum of 20 Mio EUR.

The reconstruction reserve thus allows companies to keep future profits within the company in a tax advantageous way and to rebuild their equity to pre-corona levels.

However, equity and employment must be maintained:

- the reconstruction reserve is taxable when there is a capital reduction, dividend distribution or liquidation;

- an employment condition also applies: if the personnel cost of the companies drops below a certain level, the tax advantage will be reduced proportionally. According to the pending proposal, the personnel cost for income year 2020 and the 3 following years should equal at least 85 % of the personnel cost paid in 2019. If not, a pro rata part of the reconstruction reserve will become taxable.

Finally and similar to e.g. the loss carry-back regime, companies that have a direct participation in companies located in tax havens or that make payments to tax havens that cannot be economically or financially justified, will be excluded from the regime.

We will follow-up and keep you posted on the further parliamentary evolution of the reconstruction reserve. For those companies recovering from the crisis it will become an action point for the closing of the accounts for FY 2020 and the years to come.

*Companies with closing date between January 1^st 2020 and July 31^st 2020 can opt to apply this measure for the financial year closing in 2021 instead of 2020.