Increased 25% investment deduction to end soon

One of the temporary measures during the corona crisis was the increased investment deduction of 25%. This measure expires at the end of this year. So it pays to carry out a planned investment this year still if it meets all the conditions. We will list them here again and consider possible optimisations.

Basic rate of ordinary investment deduction temporarily increased

• In 2020, the rate of the ordinary investment deduction was increased from 8% to 25% for investments carried out between 12 March 2020 and 31 December 2022 by the self-employed or ‘small’ companies.
• The ordinary investment deduction for investments until 31 December 2021, which could not be utilised for lack of sufficient taxable profits, was transferable to the next two taxable periods (2022 and 2023). Normally, such a transfer is possible for only one year.

Effects of the temporary increase

This is a temporary measure. After 31 December 2022, an ordinary investment deduction at the basic rate of 8% applies to qualifying investments.

If you still wish to benefit from the increased investment deduction of 25%, then it pays to consider whether you might bring forward your future planned investments. Of course, it must be economically expedient to do so.

From a tax point of view, it is best to check whether the investment deduction has been used to its fullest extent. If there is a loss for the fiscal year, you cannot make full use (if at all) of the investment deduction for lack of a sufficient taxable base. You must carry it forward, which for investments made in 2022 can only be done for one year.

If tax losses have been carried forward from previous taxable periods while the fiscal year shows a profit, the investment deduction can be utilised. The investment deduction takes precedence over tax losses carried forward.

It should be pointed out that you cannot apply the ordinary investment deduction and the deduction for risk capital (notional interest deduction) in the same assessment year. Since the rate of the notional interest deduction in 2022 (assessment year 2023) is only 0.443% for small companies and, moreover, this deduction is calculated only on the basis of the average growth in equity of the past five years, the application of the ordinary investment deduction will in most cases be more advantageous. We therefore believe that the greatest optimisation can be achieved through the investment deduction, especially at the temporarily increased rate of 25% applicable to investments until 31 December 2022.

Application conditions of ordinary investment deduction

Basic conditions

To qualify for the application of the ordinary investment deduction, the following basic conditions must be cumulatively met. They must be investments:

• by natural persons earning profits or revenues, or ‘small’ companies (pursuant to Article 1:24, §1-6, Companies and Associations Code);
• in tangible or intangible fixed assets that are depreciable over a period of at least three years;
• used in Belgium actually and exclusively for the professional activity;
• and acquired or created in new condition during the taxable period. This means that they either actually came into the company’s possession during that period, or that the taxpayer legally owns them during that period through a completed sale with immediate transfer of ownership, even though they have not yet been delivered and/or paid for.

You may consider intangible and tangible assets in respect of which the parties entered into an agreement but which have not yet been acquired as having been acquired or created during that period, up to the amount of advance payments made during any given year or fiscal year and recorded as such.

An invoice by itself is not sufficient, but neither is it required to speak of an ‘investment’. However, with the exception of advance payments, an act of taking possession or transfer of ownership is required. If a taxpayer has actually taken possession of the investments, but the invoices follow later, then an investment can already be considered to have taken place on the date of actual taking possession.

Basic exclusions

Certain investments are irrefutably excluded from the application of the investment deduction.

• Investments in fixed assets that are not used exclusively for the exercise of the professional activity.
  In our opinion, this does not prevent the ordinary investment deduction from being applicable to a built property that is used partly for private and partly for professional purposes. In that case, the investment deduction is, of course, reserved for the professional part. The tax authorities accept this and add the condition that the professional premises must be clearly separated from the private premises. However, this exception must be strictly interpreted and thus cannot simply be applied by analogy to other situations. For other (tangible) fixed assets, the distinction between private and professional is more difficult to establish.
   
• Investments in fixed assets that are not depreciable, such as land, or whose depreciation is spread over less than three taxable periods.
   
• Investments in assets acquired or created with a view to transferring the right of use to a third party, but not if the right of use is transferred to a taxpayer who might benefit from the same investment deduction.
  If a small company has a new property built and then makes it available to its director entirely for private use, the company cannot apply the ordinary investment deduction.

  On the other hand, if a small company has a new property built and then leases it to another small company, it may apply the investment deduction, on condition that the corporate tenant meets all the conditions for the application of the ordinary investment deduction and does not itself exercise its right to investment deduction.
   

• Investments in passenger cars and dual-use cars, including so-called ‘fake’ light trucks that are equated with passenger cars by the tax authorities and do not meet the conditions of a light truck.

Do not postpone planned investments until 2023

A qualifying investment of €100,000 that is still carried out in 2022 by a small company leads to an investment deduction of €25,000, which at the normal corporate tax rate (25%) can yield a potential tax saving of €6,250. However, if that same investment is postponed until 2023, the potential tax saving will be only €2,000. It pays to revisit your investment plans.

If you have any questions about this, we will be happy to help you further.