Deferred Tax on a Revaluation in a BV
Verenigde Machinefabriek BV owns a factory building carried at historical cost of €2,400,000 with accumulated depreciation of €900,000, giving a carrying amount of €1,500,000. In 2024 the company revalues the building to fair value of €2,100,000 under the revaluation model. The tax base of the building remains €1,500,000 because the tax authorities do not follow the revaluation. The applicable corporate income tax rate is 25.8%. The company has no tax losses and expects to recover the building through use over the remaining 15 years. The controller proposes to recognise no deferred tax because 'the revaluation is unrealised and no tax will be paid until we sell'. The company prepares its accounts under Title 9 Book 2 of the Dutch Civil Code and applies RJ 272 for deferred tax.
1. Calculate the deferred tax position arising from the revaluation and explain the recognition principle.
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The revaluation increases the carrying amount from €1,500,000 to €2,100,000, a revaluation surplus of €600,000 recognised in other comprehensive income (revaluation reserve). The tax base stays at €1,500,000, so a taxable temporary difference of €600,000 arises. Under RJ 272 a deferred tax liability must be recognised for taxable temporary differences unless a specific exception applies. The exception for initial recognition does not apply here because the revaluation is not an initial recognition transaction. The deferred tax liability is €600,000 × 25.8% = €154,800. The deferred tax should be recognised in other comprehensive income, matching the revaluation surplus, not in profit or loss. The controller's argument is wrong: deferred tax is recognised on temporary differences regardless of whether the gain is realised, because the difference will reverse over the remaining useful life through lower tax depreciation than accounting depreciation. The net revaluation reserve after deferred tax is €600,000 − €154,800 = €445,200. Disclose the revaluation, the deferred tax, and the accounting policy in the notes.
2. Explain how the deferred tax liability unwinds over the 15-year remaining life and what happens if the building is sold at its revalued amount after five years.
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Over the remaining 15 years the accounting depreciation is based on €2,100,000, while tax depreciation is based on the tax base of €1,500,000 (or the fiscal residual value). Accounting depreciation exceeds tax depreciation, so taxable profit is lower than accounting profit and the temporary difference reverses gradually. Each year the deferred tax liability is released to profit or loss in proportion to the reversal, roughly €154,800 / 15 = €10,320 per year, subject to the actual depreciation pattern. If the building is sold after five years at the revalued amount, the remaining temporary difference becomes taxable in that year. The deferred tax liability is then settled and released to profit or loss, and the revaluation reserve is transferred to retained earnings or recycled according to the accounting policy. The exact release depends on the tax base at sale and any rollover relief. Document the depreciation schedules for both accounting and tax, the annual release calculation, and the treatment on disposal. The key point is that the deferred tax is not a permanent difference; it reverses over time or on disposal.