When you make a profit by selling a company asset, you can reserve this profit for future investments. An example of a company asset is a machine, computer or building.
By reserving the profit for a reinvestment, you can postpone the taxation over the book profit. The reason for that is that you do not have to pay taxes over profit in the period itself. This possibility is called the reinvestment reserve and applies for entrepreneurs in the Dutch income tax and the partnership tax.
What are the requirements to include profit in the reinvestment reserve?
- Replacement requirement: The intention must be set to replace the sold company asset within a reasonable period;
- Book value requirement: The new company asset cannot have a lower book value than the company asset that has been replaced;
- Similar function: The sold company asset must be replaced with a company asset that has a similar economical function.
What is the replacement requirement?
With certain company assets, the requirement applies that the replacement company asset will have the same function as the old company asset. This only applies to the company assets that are not subject to deduction (like real estate) and for company assets for which deductions take place over a period of time that extends ten years (like most offices). Company assets that are subject to deductions over a period of more than ten years, are called durable company assets.
What does the book value requirement mean?
The reserved book value that has been gained on the old company asset can be invested in one or more company assets. It is important that the combined book value of the new company assets are higher than the book value of the old company asset. The book value is the purchase price of the company asset minus the deductions up to that point.
What is a similar function?
We speak of a similar function when the old company asset has a comparable function as to the new company asset. For example, when an old office is replaced by a new office, or when a machine is replaced by a more up to date model.
When to use the reinvestment reserve?
The reinvestment reserve should be used as soon as possible. This means that company assets that are subject to deductions for less than ten years, the reinvestment reserve is used with the first purchase of a new company asset:
Durable company assets
With durable company assets, it is customary that the old company asset is sold before the new company asset is purchases. However, with durable company assets, it is allowed to apply the reinvestment reserve on company assets that have been sold in a previous book year.
Non-durable company assets
With non-durable company assets, the rule applies that the reinvestment reserve can only be applied in the same book year or years after
Read more about the reinvestment deduction in the Tax Authorities’ website*. Lexlupa has published articles about fiscal arrangements, that you as an entrepreneur can use to your advantage. For example, you can find an overview of fiscal benefits for entrepreneurs in the income tax here. We also made a summary of fiscal benefits in the partnership tax in this article. Do you have any questions or want more information? Please feel free to contact us, we are happy to help.