Contribution of shares to a holding company, followed by a capital reduction? Tax abuse!

A tax-friendly way to remove reserves from your company is to sell your shares to a (holding) company that you control, which can then pay these reserves to itself tax-free and then pay the sales price. Years of criticism of this method by the tax authorities has led to a variant that was recently assessed by the Courts of Appeal of Antwerp and Liège.

Well-known holding structure

To extract money from your company in a tax-efficient way, you, as a shareholder-natural person, can sell the shares of your operating company to a self-established holding company with a tax-free capital gain. The operating company then pays out its reserves to that holding company. This payment is exempt from withholding tax and corporate tax (due to the Definitively Taxed Income deduction). The holding company can use this to pay the price of the shares. The result is that the former shareholder-natural person of the operating company can obtain its reserves tax-free.

The setting up of such holding structures has often been criticized by the tax authorities and the Office for Advance Tax Rulings. Only the setting up of a holding structure with purely business purposes (non-tax motives), such as attracting new investors or arranging succession within the family, was accepted under strict conditions. Case law is also critical of this.

Variant holding structure also fails

The Courts of Appeal of Antwerp and Liège recently ruled on a variant holding structure, perhaps prompted by the aforementioned criticism. This variant consists of the following (1) the shareholder-natural person contributes the shares of the operating company to the holding company that he or she has set up (instead of selling them). (2) As a result, the natural person does not receive cash but shares. This provides the holding company with a large amount of capital. (3) It then proceeds to a capital reduction, the payment of which, in absence of sufficient liquidity, remains provisionally due by registration on the shareholder’s current account.

In the same year, the operating company distributes its reserves to the holding company with exemption from withholding tax and application of the Definitively Taxed Income deduction. The end result here is also the tax-free distribution of the operating company’s reserves to the shareholder.

The Antwerp Court of Appeal ruled on these facts that there was tax abuse. The combination and the time lapse between the contribution of the shares in 2013, the capital reduction in 2017 without cancellation of shares and the financing of the capital reduction by the operating company on the basis of dividend payments, among other things, gave rise to this.

The Court of Appeal of Liège ruled on a similar case in which the reserves of the operating company were first distributed to the holding company, followed by a tax-free capital reduction of the holding company. The holding company never had the financial means to develop a real economic activity. The short succession of the contribution of shares in a self-established holding company and the dividend payments followed by a tax-free capital reduction, also gave rise to tax abuse.

Conclusion

To this day, it is no easy task to distribute the reserves of an operating company tax-free by means of holding structures. This requires a strong business rationale based on non-tax motives. However, the burden of proof still lies with the tax authorities to demonstrate that there is tax abuse. After all, they must be able to prove that the action taken is in violation of tax law and with the intention of avoiding taxes.

Lan Yi Verbauwhede and Evert Moonen
De Langhe Attorneys