In order to mitigate the impacts of the health crisis on business accounts, the first amending finance law for 2021 introduced an exceptional mechanism allowing a carry-back of the first loss recognised in respect of a financial year ending between 30 June 2020 and 30 June 2021.

What is carry back?

 Carry back, or “carry back of loss”, is a tax mechanism provided for under Article 220 quinquies of the French Tax Code allowing a loss recognised during a financial year by a business liable for corporate income tax to deduct it solely from the profit of the previous year and within the limit of the lowest of either the amount of profit and one million Euros. The option must be exercised within the time-limit for reporting profit/loss.

What is the exceptional mechanism?

Businesses can deduct the first loss recognised in respect of a financial year ending between 30 June 2020 and 30 June 2021 from the profit recognised over the previous three years, with no limit on the amount.

For a company whose financial year is the same as the calendar year, this therefore only concerns the year ending on 31 December 2020 and the deduction would apply to the profits generated in 2017, 2018 and 2019.

What is the amount of the carry-back credit?

The carry-back credit is equal to the loss carried back multiplied by the corporate income tax rate applicable for the three years starting on or after 1 January 2022 (15% if the company benefits from the reduced rate applicable to SMEs or 25%). The methods of calculating the carry-back credit therefore differ from those of the permanent carry-back mechanism, where the corporate income tax rate is the rate applicable to the year in which profits are generated.

The amount of the exceptional credit thus calculated is reduced by the amount of the carry-back credit already calculated when the carry-back option has already been exercised for the same loss under the conditions of ordinary law.

What is the time-limit for exercising the option?

 In principle, the option to carry back a loss must be exercised for the year in which the loss is recognised and within the same time limits as those applying for reporting the results of that year.

As an exception to this rule, the option for the temporary carry-back mechanism can be exercised until 30 September 2021. For most businesses, which end their year on 31 December, the time limit for exercising the option for the exceptional mechanism is therefore 30 September 2021.

What are the terms and conditions of the option?

The tax administration should soon specify the practical terms and conditions of the option for the temporary mechanism and indicate whether it is necessary to file an amending declaration of results.

How can the carry back be used?

Just like the ordinary mechanism, the carry-back credit can be used to pay corporate income tax due for the next five years, the fraction of the credit still not used after that time being refunded to the company.

The exceptional early repayment of carry-back credits arising from an option to carry back losses exercised in respect of a financial ending on 31 December 2020 at the latest, does not apply to credits resulting from this new temporary mechanism.

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