Liquidation bonuses: less than 3 months left
The Program Law of 28 June 2013 introduced an increase of the dividend withholding tax for liquidation bonuses (i.e. the amount reimbursed to shareholders in excess of the paid-in capital upon liquidation) from 10% to 25%, hereby bringing the rate to the same percentage as for regular dividends .
However, companies are given the opportunity until 30 September 2014 to distribute their reserves included in the last annual accounts approved before 1 April 2013 as a dividend at a tax of 10% (instead of the regular dividend withholding tax of 25%), provided these reserves are immediately contributed into the statutory capital of the company. This part of the capital will be treated as fiscally paid-up capital when it is retained within the company for at least 8 years (4 years for small companies based on article 15 of the Belgian Company Code) after its contribution, thus not giving rise to withholding tax upon any later distribution to the shareholders. In case of a capital reduction before the end of the applicable period, an additional tax will be due on those reserves, the rate of which depends on the time between the contribution into capital and the capital reduction.
On 1 October 2013, the Belgian tax authorities issued a circular letter regarding this transitory regime. The circular letter provides for additional information on the conditions that must be fulfilled for the dividend distribution and for the contribution of the dividend into the capital of the company.
Click here for the text of the circular letter
The dividends must be paid out of the taxed reserves (as included in form 328R) that are available for distribution to the shareholders. Distributions of taxable provisions and hidden reserves do not qualify.
The transitory regime is limited to the distribution of reserves that have been approved by the General Shareholders’ Meeting prior to 1 April 2013. As a result, for companies whose accounting period coincides with the calendar year, the transitory regime only applies to the reserves of the accounting period ending on 31 December 2012, provided that these accounts were approved on 31 March 2013 at the latest, notwithstanding that, based on Belgian Company Law, these companies had until 30 June 2013 to have the 2012 statutory accounts approved. If the accounts per 31 December 2012 were approved after 31 March 2013, then the transitory regime applies to the reserves of the accounting period ending on 31 December 2011.
The program law establishes a limit for the amount that can be distributed under this beneficial regime, based on the dividend distributions over the preceding 5 years. The circular letter does not provide for any clarification of this part of the regime.
Immediate contribution of the dividend into the capital
The capital increase must be made as from 1 July 2013 and ultimately during the last accounting period ending prior to 1 October 2014.
For a company whose accounting period coincides with the calendar year, this means that the capital increase must be performed on 31 December 2013 at the latest. The timeframe such company has for taking benefit from this transitory regime, is much shorter than for a company with a year-end closing per 30 September : in this case the capital increase must be performed by 30 September 2014.
The reference date for the capital increase is the date of the authentic act (requires intervention of a notary public) establishing the capital increase.
Contribution of the dividend received
For the special regime to apply, it is required that the dividend received is contributed into the capital of the company. This can take the form of a contribution kind (contribution of the dividend claim) or a contribution in cash.
The amount that must be contributed is the net amount of the dividend received, i.e. the gross dividend less the withholding tax of 10%. Whether or not this condition is fulfilled, must be assessed per shareholder and on a share-by-share basis. As a result, it is not required that all shareholders contribute their net dividends into the capital. Also, it is quite possible for a shareholder to choose to only have the regime applied to part of his participation and to only contribute the dividends related to those shares into the capital. In such a case, the withholding tax of 10% only applies to those dividends contributed into the capital, whereas the dividends related to the other shares will be taxed at the normal 25% withholding tax rate.
Immediate character of the contribution
The legislator requires that the dividends received are immediately contributed into the capital of the company. The circular letter clarifies that for contributions in cash, this means that the contribution must be fully paid-up and must be performed without any delay but in accordance with company law. The company law obligations for the capital increase continue to apply and latitude is given for the time needed to meet those.
The tax authorities acknowledge the possibility that the contribution of the dividend into the statutory capital may occur at a later date than the one on which the withholding tax on the dividend distribution is due (i.e. 15 days after the grant or payment of the dividend). In such a case and in order to immediately apply the 10% withholding tax rate, the tax authorities suggest that the company procures a document from the shareholder in which the shareholder confirms that the dividend will be contributed into the capital. If the shareholder does not effectively contribute the dividend, the company will have to pay an additional tax of 15% and late payment interest later.
Do not hesitate to get in touch with the contact persons listed here or with your regular contact at EY Tax Consultants for more information or assistance in this matter.
EY Tax Consultants welcomes the clarifications of this overcomplicated measure by the tax authorities but regrets that the circular letter leaves unanswered questions that are crucial to the business community and the tax payers, for example how the dividend policy over the preceding 5 years needs to be measured, how the new transitory regime applies to Belgian shareholders of companies established outside Belgium, etc
Hopefully, additional clarifications by the tax authorities will follow soon now. It should be noted also that the law increasing the tax rate for liquidation bonuses (which is the reason why the above measure was created) is already being challenged before the Belgian Constitutional Court.
This rate increase only affects situations where no withholding tax exemption (based on a treaty, the EU Parent-Subsidiary Directive or domestic law) would be available, and should therefore (if properly structured) not have a material impact for multinational groups.