In an earlier contribution, we discussed the extension of the investigation and assessment periods for income tax and VAT. In view of the additional time given to the tax authorities for investigating and assessing income in the event of late filing of tax returns, it is also useful to present an overview of the (sometimes draconian) consequences when a company files its tax return after the deadline.
Extension of investigation and assessment periods
Companies that are – as little as one second – late with their tax return may now be audited and taxed within a period of four years as from financial year 2022 (for calendar year accounting) or the financial year closing in 2023 (in the case of non-calendar year accounting), instead of three years as was previously the case.
Ex officio assessment
The tax authorities may also establish an ex officio assessment, whereby they determine the taxable income based on the data at their disposal. The main effect of this is that now the company must provide evidence of the correct amount of its taxable income, whereas, in the case of a tax return filed on time, in principle the onus is on the tax authorities to prove that the declared income is incorrect.
Until recently, it could be argued that a tax increase was not possible in the case of a late return. Already back in 2017, the legal basis for tax increases (article 444 ITC92) mentioned late submission of the return as a “triggering moment” to impose a tax increase, but it stipulated that the actual increase was to be calculated on the tax due on the undeclared income portion. In the case of a late return, there is, arguably, no “undeclared income portion” because – by definition – all income was declared. However, there was disagreement about this interpretation, even within the Supreme Court. The legislator therefore explicitly introduced the possibility of calculating the tax increase on the tax on the income portion declared late (Act of 27 June 2021).
The actual scales of tax increases were to be determined in the Royal Decree (RD/ITC92), but this was not done initially. Since no scales were available for determining tax increases, the late filing of a return still did not actually allow a tax increase to be imposed.
Eventually, this too was remedied by the Royal Decree of 13 September 2022. Since its entry into force on 23 October 2022, a tax increase with scales varying between 0% and 200% is possible in the case of a late return, even if the tax authorities do not dispute the correctness of the income declared late.
Ban on deduction of “tax assets” on income declared late
If the tax authorities impose a tax increase of at least 10% in addition to the ex officio assessment, the company cannot, among other things, use its tax losses carried forward, dividends received deduction (whether or not carried forward) or innovation income deduction, nor deduct the losses for the taxable period (collectively called “tax assets”) from the profits that are subject to the ex officio assessment. The belatedly declared profits thus constitute a de facto minimum taxable base (article 206/3 §1 ITC92). However, if an incorrect return is filed and the tax authorities decide to rectify it, the deduction ban only applies to the corrected part of the profits. The company can therefore still use its tax assets to the extent of the non-rectified part.
This contrasts with the situation of a company that files a correct return but files it late, and the tax authorities tax the company ex officio and impose a 10% tax increase based on the submitted tax return. All of the profits are then subject to the ex officio assessment, and the deduction ban therefore applies to them in their entirety, so the company will only be able to use its tax assets in future years.
The deferral of the deduction of certain tax assets sometimes means their total or partial definitive loss, e.g. if the company subsequently stops its activities or undergoes a tax-neutral reorganisation such as a merger or demerger. In the case of such restructurings, those tax assets are proportionally reduced depending on the net tax values of the companies involved.
A fine of EUR 50 to EUR 1,250 applies in the case of a late tax return.
Sometimes haste may be a good thing….
A late return immediately triggers a four-year investigation and assessment period. In addition, the tax authorities can tax ex officio (with the burden of proof being reversed) based on the data at their disposal and apply a tax increase on the full amount. As icing on the cake, certain tax assets may also not be deducted from the profits declared late.
This may encourage companies to file their returns sooner than desired. They would rather risk making a small error in the return which the tax authorities could correct – and having only the corrected part of the profits subject to a tax increase and the deduction ban – rather than being late in submitting a completely correct return which could be subject in its entirety to a tax increase and the deduction ban.
Companies that have found themselves in this precarious and often disproportionate situation may want to consider challenging these outcomes. There are often good arguments to mitigate these draconian consequences.
Do not hesitate to contact us with any questions on this issue.