Extended financial year
Advantages and points of attention for your business
Did you know that as a business owner, you can choose the length of your financial year yourself when you set up your company?
For most companies, a financial year lasts twelve months, neatly from 1 January to 31 December. This seems logical: it aligns with the calendar year and makes administration neater and usually simpler.
But what if that isn't convenient for your business at all? Suppose you're starting in the second half of the year, or your business is highly seasonal. In such cases, it might be beneficial for you to deviate from the standard. You can opt for an extended financial year, a shortened financial year, or even a broken financial year. This must be stated in the articles of association.
In this article, you'll discover what these possibilities precisely mean, what advantages (and pitfalls) are associated with them, and in which situations they can truly help your business move forward.
Introduction: what options for the financial year?
When establishing a company, you must choose the duration of the first financial year. By default, a financial year runs concurrently with the calendar year (1 January to 31 December), but this is not mandatory. Depending on the situation, a company can opt for an extended financial year, a shortened financial year, or a broken financial year.
This choice can have important consequences for the financial statements, corporation tax, and administrative obligations.
Therefore, it is essential to consider the period your financial report covers and its impact on the current financial year and the subsequent year.
Types of financial years
Extended financial year
An extended financial year lasts longer than twelve months, but a maximum of 24 months. A financial year is often extended when a company is established in the second half of the year, so that a first annual report does not need to be prepared within a few months. Not every company is typically established on 1 January.
Short financial year
A short financial year lasts less than twelve months, but at least one day. This is often applied when a company wants its first financial year to end on 31 December of the current year, regardless of the incorporation date. This allows a company to meet conditions more quickly, such as obtaining a reduced rate for dividend payments, which can be advantageous.
Financial year broken
Een gebroken boekjaar sluit af op een andere datum dan 31 december, bijvoorbeeld op 31 maart of 30 juni. Dit kan nuttig zijn in sectoren met seizoensgebonden activiteiten, zodat de cijfers beter overeenkomen met de realiteit van het bedrijf.
Extend financial year request
When you are established, you can apply for an extended first financial year. This means that the financial report does not have to be closed after only a few months, but only at the end of the following year.
Tax aspects of an extended first financial year
An extended financial year has direct consequences on several elements, which are explained below:
Corporation taxThe tax year can shift, meaning a reduced rate or, conversely, a higher rate may apply.
Depreciation These must be adapted to the longer period over which the financial year runs.
Win Because the period is longer, the total profit may be higher, which can also result in a higher tax burden.
Taking into account tax changes: If the current financial year extends into the following year, the tax rules of that following year apply to the entire extended financial year.
Administrative aspects
A shortening or extension of a financial year cannot be done arbitrarily. Some administrative steps are required:
Statutes: Any extension or reduction must be explicitly included in the statutes.
Extraordinary General Meeting: To change the current financial year, an extraordinary general meeting must be organised.
Publication: The amendment must be published in the annexes of the Belgian Official Gazette.
Accounting: The internal bookkeeping and financial report must be adapted to the new period.
Advantages and disadvantages
Advantages
- Better alignment of financial strategy, for example when starting in the second half of the year;
- Fewer early-stage accounts, which saves time and costs;
- More room to realise profits for investment deductions or other tax benefits;
- Flexibility in exceptional circumstances, such as a restructuring or merger.
Drawbacks
- Higher tax burden possible, as taxes are calculated over a longer period;
- More complex accounting through custom depreciation and calculations.;
- A long wait for official figures can be detrimental to financing or investors.;
- It is not advised to extend or shorten multiple times, it is only sensible in exceptional circumstances.
Decision
An extended financial year can be an interesting option for a business starting in the second half of a calendar year or needing extra flexibility. However, the tax, administrative, and financial consequences must always be taken into account.
Whether you opt for an extended or shortened financial year, or a broken financial year, it is important to make the decision in a timely manner and have it correctly included in the articles of association.
Are you currently setting up a company and unsure about which financial year to choose? Contact us and we'll guide you.
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