Austria: Draft assessment for a COVID 19 loss consideration regulation
Parliament has created the temporary possibility of a loss carryback in its Economic Strengthening Act 2020 (KonStG 2020). The Act has given the Federal Minister of Finance the authority to issue a regulation with further details. A draft assessment on a COVID 19 Loss Consideration Regulation has now been presented. We will summarise the key provisions, explaining the somewhat complex way in which they interact, to help you understand what this is all about.
Structure of the Regulation
The regulation essentially consists of three parts:
- The COVID 19 reserve in 2019 with subsequent taxation in 2020;
- The retroactive reduction of advance payments for 2019;
- The loss carryback of the loss in 2020 to 2019 and, potentially, 2018.
1. COVID 19 reserve
The basic idea is that anticipated operating losses in 2020 should be included in the 2019 assessment by means of a special deduction item, the COVID-19 reserve, at the request of the business.
The COVID-19 reserve in the 2019 assessment is deducted from the total amount of operating income. The total amount of operating income is therefore the balance of the profits and losses subject to assessment; income calculated using the full flat rate method is not taken into account. Other income not subject to assessment, e.g. from exempted foreign income, is also excluded.
The COVID-19 reserve is available to businesses using either the double-entry bookkeeping or the simple income and expenditure methods under section 4(3) of the Income Tax Act 1988.
The amount of individual items of income remains unchanged given that it is a separate deduction item to the individual items of income / types of income, which means that the reserve has no effect on the tax-free profit allowance, on how social security contributions are measured and on the procedure to establish the existence of partnerships in particular. In the case of companies with shareholders who are to be regarded as partners, the application for the COVID-19 reserve must be made by each partner in their tax assessment.
1.2 Simplified application for up to 30% tax-free
The reserve amounts to up to 30% of the positive total amount of operating income in 2019 (capped at EUR 5 million) if (small) losses are expected in 2020 but the forecast amount is not evidenced.
Another condition for this simplified application is that the advance payments for 2020 have been reduced to zero (or to the minimum level of corporation tax) for 2020 as a result of the COVID-19 pandemic.
Please remember that applications to reduce advance payments for 2020 currently have to be submitted by 31 October 2020 at the latest (see the website of the Federal Ministry of Finance for details).
1.3 Comprehensive application for up to 60% tax-free
The reserve is up to 60% of the positive total amount of operating income for 2019 if the anticipated losses in 2020 can be credibly substantiated by corresponding calculations, but capped at
- the amount of losses forecast for 2020
- EUR 5 million
1.4 Application for COVID-19 reserve despite 2019 assessment
If a final tax assessment for income and/or corporation tax has already been returned for 2019, the application to create a COVID-19 reserve is deemed a retroactive event within the meaning of section 295a of the Federal Tax Code (BAO). As such, a new assessment for 2019 can be prepared.
1.5 Reversal of the COVID-19 reserve in 2020
The reserve created in the 2019 assessment will be “automatically” reversed and reported in a separate item to operating income, thereby adding the reserve from the 2019 assessment without any additional charges. As was the case when it was created, reversing the provision has no effect on the profit allowance and social security contributions in particular.
Please remember that reversing the COVID-19 reserve in 2020 to income tax may mean a move into a higher tax bracket, especially for other income such as from rent and leases. It may therefore be worth refraining from applying for the COVID-19 reserve in 2019, or only doing so up to a point.
If there is an operating loss in 2020 after adding the COVID-10 reserve, this can be carried back to 2019 or 2018 (see below).
1.6 COVID-19 reserve and groups of companies
When it comes to groups of companies, while only the group parent company can create the COVID-19 reserve, it applies to the combined group result. The caps of 30% and 60% are also based on the combined group result. The maximum amount for the group is determined by the number of group members with unlimited and limited tax liability and the group parent, with an amount of EUR 5 million being taken into account for each group member and for the group parent.
1.7 Different financial year
If a financial year covering a different period is to end in the 2020 calendar year for the eligible applicant, the COVID-19 reserve may be calculated on the basis of the expected total negative amount of operating income in 2020 or the expected total amount of negative operating income in 2021.
This option for a different business year is the only one planned, which means that a decision must be taken on an individual basis and in consideration of business performance whether to create the COVID-19 reserve
- for the 2018/2019 business year
- or for the 2019/2020 business year
2. Retroactive reduction of advance payments for 2019
If the conditions for creating a COVID-19 reserve in the 2019 tax assessment basically exist, another application can be made before submitting the 2019 tax return to have the advance payments for income and corporation tax in 2019 retroactively lowered to the amount expected in the notice of assessment. A COVID-19 reserve can be deducted here when making the calculations,
thereby enabling even quicker access to liquidity where applicable.
Credible evidence for the reason behind reducing the advance payments must be provided to the tax office.
3. Loss carryback
An operating income loss arising out of the 2020 tax assessment, which would normally be carried forward to 2021 can be set off against positive income from 2019 and against positive income from 2018 if certain conditions are met. A corresponding application must be made when submitting the income tax and corporation tax assessments. Any losses that are not carried back are included in the tax loss carryforward as per the usual rules.
3.2 Carryback to 2019
Any remaining operating losses for 2020 after adding the COVID-19 reserve can be carried back to 2019, following an application, up to a maximum of EUR 5 million. The 75% set-off limit that normally applies to losses carried forward does not apply to the loss carryback.
3.2 Carryback to 2018 or carryforward to 2021
Losses from 2020 within the maximum amount of EUR 5 million that could not be deducted in the 2019 assessment can be carried back to 2018, following an application, up to a maximum of EUR 2 million.
Losses from 2020 not reported by way of loss carryback to 2019 and 2018 can be carried forward or deducted from 2021 onwards as per the usual rules.
3.3 Different business year
If a different business year ends in 2020, e.g. having a balance sheet date of 30 June 2020, there is the option of carrying back either an operating loss from the 2020 tax assessment or a loss from the 2021 tax assessment – in this case to 2020 and 2019.
3.4 No transfer of the loss carryback
Both the loss carryforward and the loss carryback are a strictly personal right and can only be used for the same taxpayer. This means that, as a general rule, only the individual suffering the loss is entitled to a carryback.
The only exception here is when a transfer is made to heirs taking over the business responsible for the loss at its carrying amount following the death of the individual.
It is not possible to transfer the loss carryback to different taxpayers in the course of transformations.
Please note that a company transformation can eliminate the right to loss carryback.
3.5 Loss carryback and groups of companies
The regulation only contains details about the COVID-19 reserve, not about loss carrybacks.
It is to be expected that the details regarding the COVID 19 reserve will also apply analogously to the loss carryback (see above).