Tax incentives introduced in the economic downturn

23 July 2009

Caroline Brown (UK), Anne Quenedey, Dr Patrick Sinewe (Germany)

The economic downturn has seen Governments around the world taking measures to stimulate the economy, in particular, enabling companies that are already facing difficult trading conditions to address issues relating to credit-shortage and insolvency risks.  This article looks at measures taken in the UK, France, Germany, Belgium, The Netherlands and Sweden.

 

UK

In this year’s Budget, the UK Government claims that “in the face of a steep and synchronised global downturn”, it has introduced measures of “targeted discretionary support” for the economy, particularly to help businesses’ short-term cash-flow and adjustment towards renewed economic growth. As part of this targeted strategy, the UK Government has focussed on the following tax measures for businesses which are being implemented in the Finance Bill 2009, expected to receive Royal Assent this summer, or in related regulations:

  • small companies’ corporation tax rate: this rate will be maintained at 21% for this tax year.

  • enhanced trade loss relief: for UK tax purposes, a business may relieve trading losses against profits and obtain a tax repayment to support cash-flow using a number of options. One such option is to carry back trading losses against profits arising in its previous 12 month accounting period. As part of the UK’s Pre-Budget Report 2009 released on 24 November 2008, this carry-back was extended temporarily for one year so that a business could carry back losses against profits arising in the preceding year and in the two previous periods, but only up to a maximum of £50,000. This relief has now been extended until 24 November 2010, although it is only expected to have a material impact for small businesses/companies.

  • tax payments: two different measures have been introduced here:

    • HMRC launched a new service in November 2008 designed to assist viable businesses unable to pay their tax (including employers’ National Insurance Contributions) by agreeing in suitable circumstances reasonable time-to-pay arrangements/deferral of tax without surcharges.  As part of the Budget 2009, this service has been extended to support businesses which are currently making losses or expect to do so this year and which are genuinely unable to pay their outstanding liabilities in respect of last year’s profits. 

    • the Finance Bill 2009 also introduces voluntary Managed Payment Plans (“MPPs”). These will assist smaller businesses’ cash-flow by allowing the spreading of income tax or corporation tax payments through equal monthly instalments payable over a period of up to 12 months straddling the normal due dates, but without the normal interest and penalty consequences of late payment.  As MPPs will require changes to HMRC’s systems, it is expected that this will not be operational before April 2011.

  • VAT: to stimulate the economy and customer spending, with effect from 1 December 2008, the standard UK VAT rate was temporarily reduced from 17.5% to 15%, although it is expected to increase back up to 17.5% as of 1 January 2010.

  • foreign profits package: as announced in the Budget 2009, the exemption for foreign dividends received by all companies (small companies were initially to be excluded from benefit) takes effect in respect of dividends received on or after 1 July 2009, balanced by:

    • complex restrictions to interest deductions on worldwide group debt (taking effect for accounting periods beginning after 1 January 2010) 

    • the removal of some exemptions from the controlled foreign company (CFC) rules (for accounting periods starting after 1 July 2009); and

    • a new reporting regime to replace Treasury Consent rules (taking effect after Royal Assent).
      The rules on CFCs may have to be reformed further and will be subject to further consultation.

  • first-year capital allowance: a first year capital allowance against taxable income will be available at 40% (rather than the normal 20% per annum allowance) to all businesses in respect of expenditure incurred from April 2009 to April 2010 on qualifying plant & machinery. This will be in addition to the Annual Investment Allowance of the first £50,000 spent on plant & machinery. The temporary return of this allowance will not apply to expenditure on e.g. long life assets, integral features, cars, assets for leasing etc.

  • intellectual property: the UK Government is intending to review evidence for changes to the taxation of innovative activity in the UK, including intellectual property. The review will consider the relative attraction of the tax system to global firms when they consider where to locate R&D activity and the possible impact of any tax reforms on the location of investment and employment (as well as where IP assets are held) and on tax receipts. The proposed approach is intended to be published before the 2009 Pre-Budget Report this winter.

Various other measures have been introduced with the aim of reducing costs of tax compliance as well as measures to improve the availability of finance to credit-worthy small and medium sized enterprises such as the Enterprise Finance Guarantee, involving the provision of Government guarantees on loans to viable businesses. As a final note, more recently, a consultation has been announced on enhancing business rescue/insolvency procedures in order to help UK businesses emerge stronger through the global economic downturn. This consultation paper was published on 15 June 2009 and includes proposals such as extending the option of a moratorium on creditor action to larger businesses (currently only available to small businesses).

 

France

France’s economic stimulus package encompasses several tax measures, the purposes of which – as far as companies are concerned – are mainly to help those facing financial difficulties and to sustain and develop investment.

Measures taken to improve financial situations

The Amended Finance Act 2008 (30 December 2008) includes several temporary mechanisms allowing immediate refunds, which can be summarised as follows:

  • companies can obtain an immediate refund of the tax credit for R&D expenses incurred for tax years 2005, 2006, 2007 and in certain cases 2008 (instead of using this credit to pay corporate income tax or getting its reimbursement after a three-year-period);

  • companies closing their financial year before 30 September 2008 may request the immediate refund of corporate income tax if quarterly instalments they have paid exceed the amount of corporate income tax computed for the year (instead of waiting for the final determination of the corporate income tax, i.e. almost 100 days after financial year ends);

  • companies may request an immediate refund of their carry back receivables/losses (instead of using this credit to pay corporate income tax or getting its reimbursement after a five-year-period).

Some permanent measures have also been implemented pursuant to the stimulus package:

  • qualifying small and medium-sized enterprises may temporarily take into account tax losses incurred by their foreign branches or subsidiaries (when directly holding at least 95%) in determining their income taxable in France. This cash flow advantage is however only temporary as the tax losses have to be recaptured when the foreign branch/subsidiary returns to a profitable situation, and the excess (if any) is otherwise recaptured in the fifth fiscal year following the initial offset;

  • VAT credit refunds may be requested on a monthly basis (instead of a quarterly basis); and

  • a process related to the request (and granting) of deferred payment conditions for tax debts has been legally set up.

The Amended Finance Act 2009 (20 April 2009) also provides for a temporary mechanism sustaining debt buy-back operations. In principle, when a French company buys back its debt, the positive difference between the purchase price and the face value of the debt is considered as taxable income. For debt buy-back operations made before 31 December 2010, the taxation of such income may, under some conditions, be spread over the year of the operation plus a five-year-period. This is subject, in particular, to the conditions that during the financial year of the buy-back operation, the share capital of the French company increases whereas the average mid-term and long-term debt of the company decreases.

Measures to sustain and develop investment

Measures have been taken in order to sustain investments made by companies and to favour economic activities.

In particular:

  • companies may benefit from an accelerated amortisation for investments made or acquired between 23 October 2008 and 31 December 2009;

  • companies are relieved permanently from business tax for investments made or acquired between 23 October 2008 and 31 December 2009 (i.e. they will not be included in the tax base for the term of the investment). Companies for which business tax is capped may obtain a relief corresponding to 3.5% of the depreciation of such investments.

Additionally, measures (such as tax credits, non-remunerated loans or a low VAT rate) have been voted for individuals in order to boost certain sectors (such as real estate, construction, etc).

 

Germany

Supplementary Financial Market Stabilisation Act

The German legislator enacted the Supplementary Financial Market Stabilisation Act (“Act”), which includes tools for stabilising the financial markets. As a means for stabilising the financial market, Germany has set up a state owned investment fund for which among others the Act provides specific tax relief.  In particular:

  • The Act provides tax relief with respect to German real estate transfer tax (“RETT”). Generally, if a shareholder acquires directly or indirectly more than 95% of the shares in a real estate holding company RETT will be triggered at the level of the acquiring investor.  In order to avoid a RETT burden, if a state-owned fund acquires directly or indirectly more than 95% of the shares in a company (e.g. to avoid the insolvency of a bank as in the case with respect to Hypo Real Estate AG) the law sets out that exceptionally no German RETT shall be triggered in such cases.

  • Similarly, the strict German change-in-ownership rules shall not be triggered if a German state-owned fund invests in a German company. Currently, any direct or indirect transfer of more than 25% of the shares in a loss corporation to a new owner within five years results in an immediate partial forfeiture of tax losses carried forward and any current year accumulated losses. A 100% forfeiture of tax losses carried forward occurs if more than 50% of the shares are transferred to a new owner within five years. Transfers to multiple new shareholders are aggregated, if those shareholders acted on the basis of a common plan.

Transitional change of German interest barrier rules and German change-in-ownership rules due to the enacted Citzen Relief Act (Bürgerentlastungsgesetz)

Further to the Supplementary Financial Market Stabilisation Act the German legislator passed on 19 June 2009 legislation to provide a limited and temporary tax relief for German corporations:

  • Interest barrier rules; the interest deduction limitation for taxpayers was increased. In general, a business can only deduct net interest expenses of up to EUR 1 million per year. If the EUR 1 million threshold is exceeded, the deduction is limited to 30% of taxable EBITDA, unless the so-called escape clause rule applies. Under the escape clause rules, the interest deduction is unlimited, if the equity ratio of the German business is equal to or higher than the equity ratio of the worldwide group. According to the newly passed legislation, the EUR 1 million lump sum allowance for deductible net interest expenses is temporarely increased to EUR 3 million. The increase is only granted for tax years 2008—2009 (that is, with retroactive effect also for 2008). The increase of the lump sum allowance is only applicable for fiscal years beginning 25 May 2007 and ending prior to 1 January 2010. Therefore, companies which have a fiscal year ending after 31 December should consider changing their fiscal year to calendar year in order to make use of the increased lump sum allowance.

  • Change-in-ownership rules; additional legislation is passed to mitigate the adverse effects of the strict change-in-ownership rules with respect to tax losses carried forward.  According to the new legislation, an insolvency restructuring exception shall be implemented. Under this  restructuring exception, a change in ownership should not result in a forfeiture of a tax loss carried forward, if: (i) the transfer of shares in a loss corporation is part of a plan to make the loss corporation solvent; and (ii) in addition, the “structural integrity” of the loss corporation’s business is preserved by the plan. A preservation of the structural integrity of a business should be found to exist if:

    • there is an agreement with the German worker’s council of the loss corporation concerning the preservation of jobs, and such agreement has been honoured; or

    • the company continued to pay a certain amount of gross salaries over a period of five years following the change in ownership; or

    • the shareholders made significant contributions to the equity of the loss corporation. Contributions must be made within 12 months after the acquisition of shares. Moreover, substantial contribution is only assumed, if the contributed assets have a book value amounting to at least 25% of the assets on the balance sheet of the acquired company at the end of the fiscal year prior to the acquisition. The 25% threshold is applied respectively to the percentage of shares acquired, e.g. if only 30% of shares are acquired the substantial contribution must have a book value of 7.5% of the assets of the acquired company.


The insolvency restructuring exception shall not apply, if:


    • the loss corporation’s business was already shut down at the time of the share transfer; or

    • during a period of five years following the share transfer, the loss corporation discontinues its historic business and engages in a different business sector.


The change-in-ownership rules are also applied to indirect change of ownership. In view of the scope of these rules relieves granted because of insolvency restructuring are also applicable to indirect change of ownership. However, the required structural integrity has to be met at the level of the German entity indirectly purchased. Therefore an envisaged insolvency restructuring at a higher level of a group does not conserve the loss carry forwards of German companies further down the group chain.

The insolvency restructuring exception is retroactively effective for the year 2008 and shall apply to all ownership changes that occurred between 1 January 2008 and 31 December 2009.


 

Belgium

Belgium’s Economic Repair Act aims at restoring credit and cash facilities at large, while the Companies Continuity Act mainly aims at keeping distressed companies afloat and softening the problems these companies are confronted with due to the lack of credit and cash availability. From a tax perspective, and aside from several measures that have been taken to sustain individuals’ purchasing power, the following measures have been implemented for Belgian businesses:

  • the exercise period in tax advantaged stock option plans issued between 1 January 2003 and 31 August 2008 in compliance with the Stock Option Law can be extended. This enables employees to sell their stock later on, in the hope that the plummeting stock markets recover, and is limited to stock options not exceeding a face value of EUR 100,000. 

  • normally, payroll tax has to be remitted to the Belgian tax authorities before the 15th of the month following the month in which the salary was paid. As a temporary crisis measure, it is now possible for employers to obtain a three-month-deferred payment facility without incurring administrative penalties, and the rate of interest on overdue tax has been lowered significantly.  

  • as regards VAT, deferred payment facilities have been implemented in order to limit tax pre-financing costs. Moreover, administrative penalties and interest on overdue tax shall be (partially) exempted in the event of non-payment of VAT.

  • the VAT rate applicable for private and public housing construction has been lowered from 21% to 6%, although limited to a taxable base of EUR 50,000.

  • the scope of monthly VAT refunds to taxpayers has been extended to all businesses that are in a constant refund position due to the nature of their business, provided certain conditions are met.

  • specifically aimed at rescuing distressed companies – that is to say companies confronted with short-term discontinuity – that may eventually be facing bankruptcy, tax exemptions have been implemented to the benefit of the creditors of such distressed companies, provided they agree with a court-approved debt-relief plan in favour of the distressed debtor. The tax exemption applies to the write-downs and provision for potential losses on receivables. 

  • on a regional level, the Flemish government has extended the time-limit within which additional municipal taxes fall due on real estate withholding tax.

 

The Netherlands

In the context of the global economic downturn, in 2009 the Dutch Government has introduced a number of “anti crisis” tax incentives and measures to improve the cash flow position of entrepreneurs.

General tax measures

The following measures have been introduced to provide relief to taxpayers and to encourage full payment of taxes:

  • to improve cash flow, entrepreneurs may elect to file and pay VAT (maintained at 19%) on a three-month basis instead of once per month;

  • as from tax year 2009, the effective corporate income tax rate has been reduced. Profits up to a maximum amount of EUR 200,000 will be taxed at 20%. In excess of EUR 200,000, the statutory tax rate is 25.5%; 

  • the carry back of tax losses has been made more flexible, accelerating a repayment of tax. The 2009 cash flow improvement in this regard is estimated to be EUR 335,000,000;

  • free/random depreciation of up to 50% is now permitted in respect of investments in further capital assets over the next two years; and

  • in order to encourage voluntary (non-penalised) disclosure of unreported foreign wealth, the maximum tax penalty has been increased from 100% to 300% as from 2 July 2009.

The Dutch Government has also just published a consultation paper (15 June 2009) for public comment proposing a relaxation of the country’s participation exemption rules, balanced by limitations on interest deductions and a mandatory group interest box which offers a much lower effective tax rate of 5% on group interest receipts (and group interest payments), in order to make the Netherlands more attractive as a location for group financing companies.

Energy and R&D related tax measures

To encourage R&D activities and environmentally-friendly behaviour, the following have been introduced:

  • a low (6%) VAT rate for energy saving isolation investments for residential property older than two years; in addition, so-called “double glass” will be subsidised;

  • with effect of 1 June 2009 until 31 December 2010, the so-called Energy Investment Deduction (“Energie Investeringsaftrek” or “EIA”) is available, under which 44% of the investment costs (up to a maximum of EUR 15,000) on certain energy saving equipment for rented residential property will be tax deductible;

  • annual government budgets (which set an upper limit for tax allowances) have been substantially increased for the so-called VAMIL and MIA - two facilities for dedicated environmentally-friendly investments.  The VAMIL allows depreciation at will, while the MIA is an investment allowance. 

  • as from 1 January 2009, the existing wage tax facilities for qualifying R&D activities have been extended. The R&D facility has been shaped as a wage tax withholding reduction at the level of the employer. The maximum amount of wage tax withholding reduction per employer has been increased from EUR 8,000,000 to EUR 14,000,000.

  • It is also noteworthy that the so-called “vliegbelasting” (tax on airline tickets) has, after a short life, been abolished as from 1 July 2009.

 

Sweden

In addition to reducing the corporate income tax rate to 26.3%, the Swedish Government has introduced a couple of important measures in order to stimulate the economy for small and mid-size businesses and individuals:

  • enhanced tax relief (the so-called “ROT deduction”) will be available to Swedish individuals as of December 2009. Under this relief, an individual will be allowed to make a tax deduction amounting to 50% of the costs he has incurred for hiring a contractor to make improvements and work on the individual’s permanent and/or summer home, i.e. the effect of the relief is that the income tax liability of the individual will be reduced by 50% of the costs related to aforesaid work. The relevant contractor is required to have a tax certificate. The maximum relief available to an individual is 50 000 SEK (approximately EUR 5,600) per year. The relief cannot be carried forward. 

  • a temporary deferral payment facility has been made available to employers. The deferral is granted on request unless there are particular reasons against it. The deferral is only available with respect to social security contributions and payroll taxes attributable to salary payments made between 1 February 2009 and 31 December 2009. The deferral can only be granted for two payment periods and may not exceed one year. The deferral is interest-bearing. 

 

 

 

 

 

 

 

 

 

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