Rebuilding equity: the reconstruction reserve
Companies with an operating loss for FY 2020 and expecting a taxable profit for FY 2021 should consider the application of the regime of the reconstruction reserve. Such a reserve must then be recorded in the annual accounts of FY 2021.
The reconstruction reserve was introduced last year as part of the efforts of the federal government for the recovery of the economy. It allows companies to strengthen their solvability which has been battered by the Covid-19 crisis.
Provided certain conditions and limits are respected, 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’.
This reconstruction reserve is an intangible reserve. The amount is limited by a double ceiling: the operating 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 levels before the corona crisis struck.
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 too much, the tax advantage will be reduced. 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, part of the reconstruction reserve will become taxable.
Finally, companies that have a direct participation in companies located in tax havens or make payments to tax havens that cannot be economically or financially justified, will be excluded from the regime.