The replenishment reserve: fiscal spearhead
for the post-coronavirus period
In mid-November, parliament approved a measure that should enable companies to replenish their financial reserves after the coronavirus crisis. If you keep your profits in the company, you will quickly, but temporarily, make a nice tax saving.
Cash flow or long term
We can distinguish two types of corona measures taken by our country's governments. The first type of measures is intended to protect the cash flow of companies during the containment period. Example: deferment of payment of all kinds of taxes and social security contributions. The loss carry back is also such a measure, since it allows the payment of taxes relating to the year 2019 to be deferred to 2021.
The new government is also beginning to look at the second type of measure: reconstruction after the coronavirus crisis. This is a series of measures to help businesses return to their normal level of activity as quickly as possible. And, as is often the case, taxation is the best way to achieve this.
Long-term
The big difference between these two types of measures is, of course, the period to which they relate. The liquidity position is an urgent and current problem that requires measures that have an immediate effect ... but no longer than necessary. They are therefore generally of short duration. Reconstruction takes place in the longer term. A typical consequence of the latter type of measures is that they only take effect in the following years.
The replenishment reserve
The replenishment reserve is therefore a measure of the second type. Its purpose is to restore the solvency of companies. And Parliament wishes to do so by authorising, for three taxable periods, the constitution of a replenishment reserve at the end of the accounting year relating to the 2022, 2023 or 2024 tax year.
What exactly is it about? A tax measure encourages companies not to distribute their profits from the 2022 tax year onwards, but to keep them in the company in order to restore or improve equity capital.
Exclusions
Of course, some conditions and exclusions apply:
the replenishment reserve is subject to the condition of intangibility. This means that the reserved profits cannot be distributed in any way, otherwise they become taxable ;
companies which, since 12 March 2020, have carried out a capital reduction or a repurchase of own shares or have distributed dividends are not entitled to a replenishment reserve ;
companies with links to tax havens are excluded. These are companies which make payments to related companies established in a tax haven ;
investment companies, regulated real estate companies and some other special forms of companies are excluded.
Limitations
The allocation to the replenishment reserve is not unlimited.
The allocation to the replenishment reserve is (for each tax year) limited to the amount of the reserved taxable profits of the tax period determined before the composition of the exempt reserve. The maximum amount which may be exempted for a given tax year is equal to the amount of the increase of the reserves, after positive or negative adjustments of the starting position of the reserves and before allocation to the replenishment reserve.
The second limit, and undoubtedly the most important one, is as follows: the maximum amount of the replenishment reserve is limited to the (accounting) 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's imagine that the company closes its financial year with a loss of 100, in which case the company can build up a reserve which, in total (!), does not exceed 100... so not 100 every year.
Finally, a third limit is provided for: the replenishment reserve may in no case exceed 20 million euros.
So that's it for the limits... You do not have to set up the replenishment reserve if you do not wish to do so, nor do you have to allocate the maximum amount to it. If you have deductible donations or exempt income, it may be better to take advantage of these deductions and exemptions before exempting the remaining tax benefit via this replenishment reserve. Finally, you have three years to reach the maximum amount of the reserve.
Takeover
Sooner or later the reserve will be taxable again.
This will be the case in particular if the company repurchases its own shares (up to the value of the repurchase), distributes dividends (up to the amount of the dividends) or carries out a capital reduction (up to the amount of the capital reduction).
The tax exemption is also linked to a condition of occupancy. Occupation is "measured", not by counting the number of employees, but by looking at wage costs. The starting point is the amount included under the accounting item "620 Remuneration and direct social benefits" in 2019. If a replenishment reserve is set up, a check is made each time to ensure that the amount of remuneration in the year in which the reserve is set up is not less than 85% of the situation in 2019.
Example
Let's imagine that the amount included in the item "620 Remuneration and direct social benefits" in 2019 amounts to 100,000 euros. The starting point or threshold for the occupancy condition is therefore 85,000 euros. During the financial year 2021, the company will set up an exempt reserve of 200,000 euros. Item 620 still amounts to 100,000 euros.
For the financial year 2022, the amount increases to 80,000 euros (which is therefore less than 85% of the situation in 2019). 5,000, i.e. the difference between item 620 in 2022 ('80,000) and the starting point ('85,000).
If, in the accounting year 2023, the wage burden in item 620 (and thus the occupation) falls further to 70,000 euros, an amount of 10,000 euros will be taxable again (starting point (85,000) minus the current situation (70,000 euros), but 5,000 euros have already been taxed).
Taxation cannot go "beyond" the amount of the replenishment reserve: if the reduction in salary charges is greater than the amount of the replenishment reserve, the replenishment reserve will become fully taxable, but not beyond.
Reserved profits become taxable when you start distributing them. In the end, the tax that has not yet been collected at the time of the liquidation of the company will be due at that time.
The replenishment reserve certainly offers possibilities for some companies, but the conditions are very strict and may not appeal to all shareholders for a long time. Companies that have been able to keep their heads above water in 2020 (and have not suffered losses) cannot build up an exempt replenishment reserve.
