Tax treatment of reimbursement of share capital by foreign companies: administrative guidance published
The tax administration recently published an Administrative Circular, which deals with the tax treatment of the reimbursement of share capital in the framework of capital decreases by foreign companies (Administrative Circular Ci.RH.231/602.851 (AAFisc./AGFisc N° 2/2012) of 10 January 2012, available on Fisconetplus).
The tax administration therein lists the conditions under which such distributions do not constitute a taxable dividend. The position of the tax administration in this circular is in line with the position taken by the Ruling commission in the past.
Similar conditions for non-taxability as for reimbursement by Belgian companies
According to article 18, 2° of the Income Tax Code 1992, the distribution of share capital is in principle considered as a taxable dividend.
An exception is made for the reimbursement of paid-up share capital that is distributed following a regular decision of the General Shareholders’ Meeting on a reduction of capital in accordance with the Belgian Company Code.
A strict reading of this provision would lead to believe that the reimbursement of share capital by a foreign company always constitutes a taxable dividend for the beneficiary since the capital reduction is never performed in accordance with the Belgian Company Code.
The Ruling commission, however, already applied a more lenient approach in its rulings, in which it does not classify such payments as dividends under similar conditions as for the reimbursement of share capital by Belgian companies (e.g. ruling n° 800.039 of 27 October 2009 and ruling n° 800.343 of 25 November 2008).
The same position is now adopted by the tax administration and inserted in the administrative commentaries (added to Adm. Comm. n° 18/28.1).
Consequently, reimbursements of share capital by foreign companies are not considered a taxable dividend insofar:
- the foreign capital concerned has the same nature as the paid-up capital in article 184 Income Tax Code 1992 (i.e. the capital should stem from an external contribution, it should serve as a guarantee for third parties and it may not be taken into account for profit distributions), and no reduction of the capital has already taken place;
- the reimbursement is imputed from the paid-up capital;
- the decision regarding the reimbursement is taken in accordance with the applicable company law, of which the rules must be similar to those in the Belgian Company Code.
The Administrative Circular confirms the position already taken by the Ruling Commission and forms the basis for its general application by the tax administration.
As a result, it corroborates the tax-efficient nature of capital (share premium) decreases by foreign companies and establishes these operations as a viable option for cash repatriation.
Since the concepts of share capital, share premium and reserves may differ in many jurisdictions from the Belgian classification and company law regulations, careful analysis should still be done to determine whether the repayment by a foreign entity effectively qualifies as fiscally paid-up capital following the definition under Belgian tax law.
Moreover, depending on the amounts involved, on the book value of the shares and on the accounting treatment of the capital decrease, such a capital decrease may still lead to taxation.
For more information or assistance on this matter, contact your regular Ernst & Young contact or alternatively, Peter Moreau.