The current crisis is plunging a large number of companies into a completely unprecedented economic and financial situation, making it even more vital for them to optimise their cash flows.
In unpredictable and uncharted times, one thing is unfortunately certain: many companies will make a loss this year.
The management of fiscal deficits of companies subject to corporation tax therefore provides significant potential to mitigate the impact of these poor results and, ultimately, better overcome any resulting difficulties.
One question in particularly arises: how to handle fiscal deficits recorded at the end of the 2019 and 2020 financial years? The solution: defer them. Fine, but how?
Two methods for deferring deficits
Companies may, of course, allocate deficits recorded at the end of the financial year (2019 and 2020, for example) to the profits for the following financial years, without any time limit (2020, 2021, etc.).However, it should be noted that this carry forward is only possible up to a maximum of €1 million plus half the profit or loss above that amount1.Furthermore, that allocation does not immediately improve the company's financial situation.
Another option, which is used less frequently, but which may be preferable in the current situation, is the carry-back of deficits, which allows a deficit recorded at year-end to be offset against the previous year’s tax profit up to €1 million2.
Carry-back limited by law
In concrete terms, the deficit for the financial years ended in 2019 or 2020 may decrease the taxable income for the financial years ended in 2018 and 2019 respectively, up to a limit of €1 million.
However, it should be noted that the taxable profit to which the deficit can be allocated (the “allocation profit” or “bénéfice d’imputation”) is not the taxable result recorded, but a profit to be restated.
On the one hand, only the profit giving rise to an effective payment of corporation tax is taken into account. The taxable result – taxed, but settled via tax credits where applicable – is therefore excluded.
On the other hand, that profit is reduced by the amount of its fraction, distributed where applicable.
Immediate improvement in the company’s accounting position and medium-term cash position
The company then holds a receivable from the Treasury equal to the corporation tax (excluding additional contributions) calculated at the rate in force at the end of the year during which the allocation profit was realised.
Recognised as income (non-taxable), this receivable improves the company’s profit or loss, equity and, more generally, the overall picture of its accounts. However, in principle, this receivable cannot be repaid immediately.
It may either be transferred by way of a Daily assignment or retained to be allocated to corporation tax due in respect of financial years ended in the five years following that of the end of the financial year in respect of which the carry-back option was exercised. It is only at the end of this period that the receivable becomes refundable.
By way of exception, companies subject to safeguard, receivership or compulsory liquidation proceedings are entitled to request repayment immediately as soon as the collective proceedings are initiated.
A simple option to exercise…
In practice, the option must be exercised within the deadline for filing the profit or loss returns on Form 2058-A. Furthermore, the company must attach Form 2039-SD to its corporation tax balance statement3.
In tax consolidation groups, the option is exercised by the parent company, since the integrated subsidiaries are no longer able to carry back their deficit4. It should be recalled in this respect that in a recent decision, the Council of State ruled that the parent company cannot allocate the overall fiscal deficit of a new tax consolidation group to the overall profit of a former tax consolidation group which had ceased and of which it was the head of the group at the time. Therefore, the overall deficit of the new group can only be carried back on its own profit5.
…within mandatory deadlines
Note that a company that fails to exercise the option within the deadline permanently loses the right to carry back the deficit for the financial year in question6.It should also be noted that companies in collective proceedings can no longer carry back their deficit once the proceedings have begun7.
However, the company may submit a claim asking to carry back the deficit for a financial year to the profit for a restated financial year. Similarly, if a deficit is increased (or recorded) following a tax inspection, a claim may be submitted asking for the surplus deficit to be allocated to the profit of a previous financial year8.
The lessons learned from the 2008 crisis: towards an easing of repayment methods?
Although the scheme is interesting, the strict constraints to which it is subject undermine its effectiveness.
In particular, the repayment period for receivables prevents most companies from meeting their short-term cash requirements. And when they do finally obtain the tax refund, it is very late for those experiencing financial difficulties even if they are not subject to collective proceedings.
For this reason, the legislator allowed immediate repayment of carry-back receivables as part of the economic recovery plan adopted following the 2008 crisis.
In 2009, companies were therefore allowed to request the immediate repayment of unused receivables arising from the option to carry back deficits from financial years 2004 to 2008 inclusive9.The purpose of this was to allow companies to reconstitute their cash by speeding up the repayment of their carry-back receivables.
They were also able to exercise the option to carry back deficits from the second working day following the end of the financial year without waiting for liquidation of corporation tax, on the basis of an estimate of the deficit in question, with a tolerated error margin of 20%.
Given the unprecedented scale of the unfolding crisis, it is possible and even desirable that parliament may adopt exceptional measures of this kind in the coming months.
Taking that possibility into account, companies that have opted to carry back their 2019 deficit would therefore gain more quickly in terms of cash flow than if they had chosen to carry forward. This is particularly true if no return to profit is expected within several years or if the amount of the deficit for the financial year far exceeds the maximum fraction able to be allocated to previous profits.
In the current exceptional circumstances, the scheme merits further simplification, such as an increase in the allocation profit, to align it with the profit applicable to the carry forward, and extension of the carry-back period (to three years, for example, as was the case previously, instead of the current one year).
In any event, the carry-back option must be considered carefully during this period of recession and financial difficulties, as it provides companies with the opportunity to make better use of their deficits than carry-forward alone.
1French Tax Code, Art. 209, I.
2French Tax Code, Art. 220 e.
3French Tax Code, Appendix III, Article 46 quater-0 W.
4French Tax Code, Art. 223 G.
5EC 3 -8 section 2-12-2019 no. 420910, min. vs Sté Courant SAS.
6BOI-IS-DEF-20-10, no. 260.
7French Tax Code, Art. 220 qunquies, II.
8CE 10e -9e s.-s. 19-12-2007 no. 285588 and 294358, SA Vermédia; BOI-IS-DEF-20-10, no. 50 and 60.
92008 Amended Finance Law no. 2008-1443 of 30 December 2008 (1), Art. 94.
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