Accounting treatment of the reconstitution reserve
August 2021 – The CNC has published an opinion on the accounting treatment of the replenishment reserve. The replenishment reserve is one of the main measures to help companies recover from the pandemic. What does it mean in practice?
Taxation
The replenishment reserve allows companies to restore their solvency position. Companies that do not pay out their profits from the 2022 tax year to the 2024 tax year, but keep them in the company, are exempt from paying tax on these amounts.
The replenishment reserve is not unlimited.
Firstly, it is limited to the (book) losses of the financial year ending in 2020 (companies that close their financial year between 1 January and 30 June 2020 can opt for the financial year 2021). Let us assume that the company closes with a loss of 1 000 euros. In that case, it can build up a reserve which in total (!) cannot exceed 1 000 euros... so not 1 000 euros each year.
Secondly, the replenishment reserve (for each new financial year) is limited to the reserved taxable profits of the taxable period determined before the composition of the exempt reserve.
Finally, the replenishment reserve may in no case exceed 20 million euros.
However, certain conditions apply:
the replenishment reserve is subject to the condition of intangibility. Consequently, the reserved profits may not be paid out under penalty of becoming taxable;
the company has not reduced its capital or bought back its own shares since 12 March 2020. Nor can it have distributed dividends.
Accounting
Operating losses
The first limit of the replenishment reserve is the accounting losses. The CNC confirms that this means the negative difference between operating income and operating expenses, as shown in the model annual accounts filed with the National Bank of Belgium, under code 9901. No account is taken of the company's other results, which include financial income, financial expenses and the tax result.
The reserve
The second limit is the amount of the reserved taxable profits of the taxable period determined before the constitution of the exempt reserve referred to in Article 194quater/1 of the CIR 92. In concrete terms, this is the reserved result less, among other things, certain capital gains on shares, write-backs of write-downs on shares previously recorded as non-allowable expenses and the final tax shelter exemption.
Condition of intangibility
In order to obtain and maintain the exemption, the reserve must be booked to one or more liability accounts and these accounts may not be used as a basis for calculating the annual allocation to the legal reserve or any remuneration or allocations.
Reversal
The exemption is taken back if the company carries out one of the following operations
repurchase of own shares (up to the value of the repurchase) ;
dividends (up to the amount of the dividend)
capital decrease (up to the amount of the capital decrease).
A reversal also applies if the company's profit and loss account shows an amount for item 620 (Remuneration and direct employee benefits) that is less than the threshold of 85% of the amount established for the same item at the closing date of the financial year ending in 2019. This means in effect that if employment in the company decreases after the replenishment reserve has been established, the exemption will be taken back.
Example 1
A company has recognised an amount of 100 000 euros in 2019 under item 620 "Remuneration and direct employee benefits". The operating losses for the financial year 2020 amount to 200 000 euros.
The reserved taxable profits for the financial year 2021 (before the replenishment reserve is set up) amount to 350 000 euros. The company sets up a replenishment reserve of 200 000 euros (the maximum amount) in that year.
For the financial year 2022, it appears that item 620 has decreased from 100 000 to 80 000 euros, which is below the 85% threshold. The replenishment reserve must therefore be written back by 5 000 euros.
In the financial year 2023, item 620 falls further to 70 000 euros. In that year, the company cannot book an additional reserve, as the maximum has been set aside from the outset in 2021. The company must now take back 10 000 euros from the exempt reserve.
Example 2
A company has booked an amount of 100 000 euros in 2019 under item 620 "Remuneration and direct employee benefits". The operating losses for the year 2020 amount to 250 000 euros. Item 620 decreased to 90 000 euros.
For the financial year 2021, the reserved taxable profits of the taxable period determined before the constitution of the exempt replenishment reserve amount to 100 000 euros and the company constitutes a replenishment reserve of 100 000 euros.
In the financial year 2022, item 620 only amounts to 80 000 euros. The earmarked taxable profits of the tax period determined before the exempt reserve now amount to 180 000 euros.
What additional amount can the company still book to the building reserve in 2022? 150 000 euros (the operating losses - the first limit - amounted to 250 000 euros, but 100 000 euros have already been booked). 5 000 euros must be deducted, as item 620 has fallen below the 85% limit (85 000 – 80 000 euros).
Let’s assume that the company distributes a dividend of 60 000 euros in the year 2023. The total of item 620 for that year still amounts to 80 000 euros. This distribution forces the company to take back the exemption up to the amount of the dividend.
If, in the financial year 2024, the company distributes a dividend of 200 000 euros, the reconstitution reserve must be written back to the extent of the remaining 185 000 euros (= 250 000 - 5 000 - 60 000).
