Tax law - New Rules On The Tax Deductibility Of Bad Receivables

Under Belgian corporate income tax law, companies are taxed on an accrual basis, which implies that companies are taxed on their receivables even if they are not yet paid. Belgian accounting law provides that a reduction in value should be recorded on claims, the payment of which is uncertain or doubtful at maturity. Before assessment year 1996, such a reduction in value on receivables was only tax deductible provided that the total amount of the tax-exempt reductions in value on claims recorded in a given year did not exceed 5% of the taxable income in the same year and that the total amount of all exempted reductions in value did not exceed 7.5% of the highest taxable income of the last 5 years. As a consequence, Belgian companies were taxed on doubtful claims to the extent that these limitations were exceeded.

It was felt that this tax provision did not reflect the economic reality and was thus disadvantageous for the business environment. The Government finally decided to delete these restrictions as of assessment year 1996 (see Royal Decree of 20 December 1995 modifying Article 22 R.D./I.T.C., Belgian State Gazette of 28 December 1995).

Although the quantitative limits have been deleted, the other conditions and formalities must still be respected in order for the reduction in value on bad receivables to be exempted from tax, these conditions and formalities being:

1. the losses, for which reductions in value are recorded, must be tax deductible as business losses and may not pertain to securities (e.g., bonds, notes, etc.) whether in registered or in bearer form;
2. the losses must be accurately described and should be of a probable nature; moreover, they must be specific and may not result from a purely general risk;
3. the reduction in value should be recorded at the closing of the financial year and its amount should be recorded in a separate account; and,
4. the total of the tax-exempt reductions in value should be justified and explained per item in a listing which must be attached to the tax return.

The content of this article is intended to provide general information on the subject matter. It is therefore not a substitute for specialist advice.

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