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17 November 2017

Implementing a capital reduction will require some tax calculations

Implementing a capital reduction will require some tax calculations

The government wants to lower the corporate income tax rate from 33% to 29% as of 2018 and to 25% as of 2020. This change was much needed to safeguard competitiveness with our neighbouring countries. However, the Summer Agreement also contains a number of measures to compensate for the loss of tax revenue. One of these measures is the amendment of the rules on capital reduction.

Current system

A company can choose how it distributes its funds to the shareholders. If reserves are paid out as dividends, withholding tax (30%) is due. The company may also, however, opt to repay capital. To the extent that this capital reduction is charged on the paid-up fiscal capital (i.e. capital represented by contributions in cash or in kind), no withholding tax is due.

Planned system as of 1 January 2018

As of 1 January 2018, a capital reduction will be charged pro rata on, on the one hand, the taxed reserves of the company and on the other hand, on the paid-up fiscal capital. The part of the capital reduction that is charged on the taxed reserves will be subject to withholding tax. Only the part of the capital reduction that is charged on the paid-up fiscal capital will be paid out to the shareholders tax-free.

An example for clarification:

A company has an equity of 1,000,000 EUR, consisting of a paid-up fiscal capital of 300,000 EUR and taxed reserves of 700,000 EUR. When the capital is reduced by 100,000 EUR, 30,000 EUR will be charged on the paid-up fiscal capital and 70,000 EUR on the taxed reserves. On the amount of 70,000 EUR, withholding tax (21,000 EUR) will be due.

While the shareholders would receive 100,000 EUR net today, after 1 January 2018, they will receive no more than 79,000 EUR net.

Should you take action before 1 January 2018?

If your company has substantial taxed reserves, it may be worthwhile to implement a capital reduction before 1 January 2018. However, make sure that you comply with company law obligations in this respect (convocation of the general meeting, valid deliberation, effective payment at the earliest two months after the publication of the capital reduction in the Belgian Official Gazette, etc.).

Also in the field of taxation, the necessary caution must be taken:

  • In recent years, many shares of operating companies have been transferred into newly created holding companies. As a result of the created step-up, the holding companies acquired a high paid-up capital. Such contributions were accepted, provided that the contribution was made for commercial reasons and/or that certain commitments were observed.If you decide today to reduce the capital of the holding company, it must first be checked whether the made commitments have been observed.  It is expected that the administration will look at these capital reductions with suspicion and that they will, on the basis of the general anti-abuse provision, try to requalify the capital reduction into a dividend payment on which withholding tax is due.
  • On 1 October 2014, the rate of withholding tax on liquidation bonuses was increased from 10% to 25% (currently 30%).  In order to avoid a wave of liquidations, an arrangement was provided in which a company could incorporate part of its taxed reserves into the capital on the condition of immediate payment of 10% withholding tax.  If an SME retains the incorporated reserves within the capital for at least 4 years, no additional tax will be due in the event of a later capital reduction.If you have made use of this locking mechanism, the minimum term of 4 years mentioned above will usually not have been expired yet.  The law provides that capital reductions should be charged as a matter of priority on the taxed reserves incorporated in the capital.  This implies that you would face an additional tax (10% or 5%, depending on the time of incorporation) if you were to implement a capital reduction today.The law draft provides that the incorporated reserves can be paid after the expiry of the minimum period without having to apply the pro rata scheme.
  • Certain inheritance plans require that temporarily no capital reductions are implemented. If you do so anyway, there may be a settlement in the inheritance tax.

A notified reader is worth two.  Seek advice in time so you do not risk finding a poisoned gift under the Christmas tree!

Frank De Langhe – Nicolas Lauwers

Published in VOKA – “Ondernemers West-Vlaanderen”, edition 18, 17 November 2017

 

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