EU recommends carry back of tax losses for 2020 and 2021

Written by Demetris Nicolaides
19 August, 2021

The effects of the COVID-19 have been unprecedented and substantial to businesses across the world with many businesses racking in heavy losses and struggling for survival while many have already closed down permanently. At the EU level, the Commission has taken a series of initiatives to help out businesses in their recovery post COVID-19 and has approved plans for further stimulus packages to aid businesses.

In parallel to this work, we have seen great work being undertaken by the OECD/G20 Inclusive Framework on the BEPS 2.0 currently underway and the US taking a U-turn and joining forces. The EU has grasped the new momentum and issued a Communication Business Taxation for the 21st Century (the “Communication“) on 18 May 2021 outlining its short and long term plans for a new tax framework which will support the digital and green transitions.

As part of that Communication, one immediate such measure is the Commission Recommendation of 18.05.2021 on the tax treatment of losses during the COVID-19 crisis recommending to EU Member States to allow the carry back of tax losses to at least the previous fiscal year.

The Commission recognised that for Member States (MS) whose only available treatment of taxable losses is to carry them forward, like Cyprus, there is no real and immediate benefit to their struggling businesses which are in need of liquidity now. And while some MS already have this carry back policy in place and available for their local businesses, businesses in some MS do not, finding themselves in a disadvantageous position in regards loss-offset provisions.

The recommendation from the Commission to EU MS is summarised below:

  1. Allow businesses to carry back taxable losses generated in fiscal years 2020 and 2021 against profits generated in 2019 at least with the option for MS to apply this to 2017 and 2018 fiscal years.
  2. If opting to carry back the losses to 2017, then the eligible businesses should not have incurred any losses in any of fiscal years 2019, 2018 and 2017 to ensure that only profitable businesses that have been affected by the effects of COVID-19 benefit from this measure.
  3. Limit the amount of losses to be carried back to a max of EUR 3 million per loss making fiscal year – this would provide valuable support for smaller companies in particular, while also ensuring that all taxpayers benefit to some extent. MS will be able to opt a smaller cap.
  4. Lastly, MS should allow businesses to immediately claim back the carry back of losses which they estimate to incur in fiscal year 2021, without the need for waiting until the end of the year.

The carry back of losses will immediately create a refund of taxes and MS will then have to be ready to provide the necessary liquidity to eligible businesses.

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