The long awaited corporate income tax (CIT) reform has brought many changes. A measure that tends to be easily overlooked is the increase of the Corporate Income Tax surcharge as a result of insufficient prepayments. For closings as from December 31st 2018 onwards, this increase in CIT surcharge will have a considerable impact on the tax liability of companies of all types and sizes.
Every company in a tax paying position can prepay its CIT . There is no obligation to do so, but it is the only way to evade the surcharge that applies if no or not enough prepayments are made. Each tax prepayment leads to a credit, which reduces the overall CIT surcharge.
Prepayments can in principle be made throughout the course of the financial year, but the amount of the credit depends on which quarter the prepayment was done. As shown below, a payment made in the first quarter will lead to the highest tax credit, while a payment made in the fourth quarter will only lead to half of the first tax credit. For prepayment purposes, the quarters end by the 10th day of the fourth, seventh and tenth month of the accounting year, and the 20th day of the last month. This means that for a December 31st 2018 financial year end, a credit cannot be obtained anymore if the prepayment is done after 20 December 2018.
If, for a certain year, too much prepayments were made the tax payer can opt to have the excess prepayments either refunded or used as a tax prepayment for the following tax year by means of a written request to be done ultimately within one month after receipt of the prepayments slip.
To determine the amount of the prepayments needed, the resulting tax liability of the year should be forecasted. To ensure that no CIT surcharge would arise, it is possible to make sufficient prepayments in the first or second quarter, as these credit rates exceed the surcharge rate. However, cash-flow requirements of the company would need to be taken into account.
For the assessment year 2018 (financial year ended as from December 31st 2017) a surcharge rate of 2,25 % on the tax liability of a company applied. However, no surcharge was owed if the amount was lower than 0,5% of the tax payable or did not exceed 80 EUR. As the impact of this surcharge was often rather limited, certain companies opted to make no prepayments.
The corporate tax reform has made the regime surrounding prepayments more severe. For financial years starting from January 1st 2018 onwards (assessment year 2019) the surcharge rate has been increased to 6,75%. The applicable credit rate has been adjusted alike: for the first quarter a credit of 9% will apply, for the second quarter 7,5%, for the third quarter the rate is 6% and for the last quarter 4,5%. Moreover, the tax increase will also be due even if it does not exceed 0,5% of the initial corporate tax or 80 EUR.
The impact of this new measure can be illustrated by an example shown below, in which a company (financial year ending on December 31st ) makes prepayments in April.
We will present below the situations for AY18 and AY19, assuming that the corporate income tax rate would be 29,58% for both assessment years.
|EUR||AY 2018||AY 2019|
|Prepayments (April, 8)||30.000||30.000|
|Surcharge : 88.740 x|
|Tax credit : 30.000 x|
As shown by the example above, prepayments have become considerably more important for companies who are interested in avoiding an extra tax liability. If you consider doing a prepayment before April, 10th or if you want to reevaluate your strategy on eventual excess prepayments made in 2017, it is recommended to request the assistance of a tax advisor before the end of March.
For more information, please contact your KPMG tax advisor or send an email to : firstname.lastname@example.org
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