The European Commission adopted, on Tuesday 18 May, in parallel to its Communication on company taxation (see other news), a Recommendation on the tax treatment of losses, in order to support companies during their post-Covid-19 recovery phase.
In concrete terms, the Commission calls on Member States to allow loss-carry back for businesses to at least the previous fiscal year. In this way, companies that were making a profit and paying taxes in the years prior to 2020 would be able to offset their 2020 and 2021 losses against these taxes.
“This ensures that the measure is targeted at those businesses suffering as a direct result of the pandemic, and that public money is not spent trying to help private businesses that are failing for reasons unrelated to the crisis”, the Commission explains. It will, in its view, be particularly beneficial to SMEs.
The Commission also recommends that Member States limit the amount of losses carried back to €3 million per loss-making fiscal year.
It should be noted that in its Communication, the Commission announced another measure which should contribute to the re-stocking of companies that are financially vulnerable due to the Covid-19 crisis. The Commission intends to present a legislative proposal in the first half of 2022 to introduce a Debt Equity Bias Reduction Allowance (DEBRA).
The economic crisis that followed the Covid-19 pandemic contributed to a considerable increase in the stock of corporate debt. However, the debt-friendly tax incentive currently provided for in the tax rules, which allows companies to deduct interest related to debt financing but not costs related to equity financing, may encourage companies to accumulate debt, the Commission explains.
“This could lead to a surge in insolvencies, with negative repercussions for the EU as a whole”, it points out.
At the time of going to press, the Recommendation had still not been published by the Commission. (Original version in French by Marion Fontana)