Loss reversal and equity distribution
With loss carry-back, the government wanted to preserve the cash flow of contractors in times of coronavirus. However, this is only possible if the company has not mortgaged its liquidity position by making a dividend distribution or, more generally, a distribution of equity capital. But what about directors' fees?
Loss reversal in brief
The Corona III law allows entrepreneurs (both individuals and companies) to deduct any losses incurred as a result of the coronavirus crisis not from future profits, but from the profits of the previous year.
In concrete terms, this means that if a company, for example, makes a loss of 100 in 2020, it does not have to wait until 2021 to deduct this loss from the 2021 profits (2022 return), but can already deduct this amount of 100 from the 2019 profits (2020 return).
This loss can, of course, only be deducted once, so you will no longer be able to deduct this loss in the 2020 income tax return (which you will have to file in 2021).
So what is the advantage? With the loss retro-imputation, you avoid having to pay tax on income from 2019 while at the same time you have to record a loss in 2020.
No distribution of equity capital
To ensure that this measure does not benefit companies that do not actually need it, a number of conditions must be met. One of these conditions is that the company may not have distributed dividends during the corona period (i.e. from 12 March 2020 up to and including the day of the introduction of the declaration relating to the tax year 2021). The repurchase of own shares and a capital decrease are also excluded during this period, which is not illogical since these transactions have a negative impact on your cash flow. According to the government, it is then not necessary to help you with a measure that is supposed to improve your liquidity position.
However, the government has defined these transactions rather broadly. In addition to dividends, share repurchases and capital reductions, the law also provides for "any other reduction or distribution of equity capital".
Director’s fees
In a circular, the tax authorities state that directors' fees can be problematic.
Where directors' fees can be reclassified as dividends, the company will not be able to have recourse to the retro-imputation of losses. This will be the case in particular when the company director is also a shareholder or partner of the company.
Conversely, the granting of a director's fee to a company director who is not a shareholder should not prevent the retroactive application of losses.
But the Minister of Finance sees things differently. In response to a parliamentary question, he noted that the legislation in this area is clear. The words "any other reduction or distribution of equity" exclude any exception. A directors' fee therefore also blocks the retro-imputation of losses.
The Minister is particularly strict, and one wonders what the impact of his decision will be, for example for directors who, during the accounting year, are granted advances on their directors' fees.
Not only for this measure
It should also be noted that the condition that there can be no distribution of dividends does not only apply to the retro-imputation of losses. The exemption from payment of withholding tax and the increased bonus rates for advance payments are also subject to this condition. For these measures too, no directors' fee can therefore be granted in the period during which the taxpayer benefits from the advantage.
