Tax regime for capital reductions

The law of 25 December 2017 introducing a corporate tax reform has profoundly amended the tax regime applicable to capital reductions by corporations.

Prior to this legislative change, a company was able to proceed with a capital reduction without any tax consequences, provided that - in the notarial deed - the capital reduction was sourced from paid-up capital (or fiscal capital) and that the reduction of capital was triggered by a regular shareholders decision in accordance with the provisions of the Companies Code.

From 1 January 2018 onwards, a capital reduction is partially considered as a dividend payment for tax purposes, which may have consequences in terms of corporate income tax and withholding tax.

In the past, capital reductions could be fully allocated to paid-up capital (or fiscal capital), and hence did not trigger a tax impact. Since the entry into force on 1 January 2018 of the law of 25 December 2017, a reimbursement of capital has to be pro rata allocated to :

• paid-up capital (as well as share premiums), and
• taxed reserves (whether or not incorporated into capital) and tax-exempt reserves incorporated in capital.

The portion allocated to the reserves is deemed to be a dividend for tax purposes and is (i) firstly allocated to the taxed reserves incorporated in capital, (ii) secondly to the taxed reserves not incorporated in capital and (iii) finally allocated to tax-exempt reserves incorporated in capital.

However, certain equity elements are not subject to this new pro rata rule, more specifically, the legal reserve up to the legally required minimum, the tax-exempt reserves not incorporated into capital, the liquidation reserves and unavailable reserves for own shares.

The amount of reserves taken into account for the proportional allocation will be determined at the end of the taxable period preceding the period in which the reimbursement of capital is made. The amount of these reserves will be reduced, where applicable, with intermediate dividend distributions.

With respect to reimbursements of paid-up capital by a foreign company, the notion “paid-up capital” must be understood within the meaning of the definitions given by the Belgian Income Tax Code (CIT). The notions reserves and provisions are those covered by similar provisions of foreign law.

Please note that the proportional allocation rule set out above does not apply to reimbursements of capital out of the liquidation reserves meant by article 537 CIT. Under article 537 CIT, SME’s were allowed to increase their paid-up capital out of net dividends (net after 10% withholding tax). In the event of a later capital reduction, the reduction will primarily be considered as a reduction of the article 537-capital and will not trigger withholding taxes if a period of at least 4 or 8 years (small versus big companies) has lapsed between the capital increase and the reimbursement of capital. 

The proportional allocation of the capital reduction to paid-up capital will not trigger any tax consequences. The portion of the capital reduction that is allocated to the company's reserves may trigger consequences in terms of corporate income tax and withholding tax.

Corporate income tax

No corporate income tax will be due for capital reductions deemed to be derived from reserves that were previously taxed at the level of the company (the most common case). 

Capital reductions that are deemed to be derived from tax-exempt reserves incorporated into capital, however, will be subject to corporate income tax. 

Withholding tax 

The portion of a capital reduction that is allocated to reserves, will qualify as a dividend for tax purposes and becomes subject to withholding tax (if applicable). Hence, the distributing company will have to submit a withholding tax return within 15 days following the date of attribution or payment of the dividend/repaid capital. The same deadline applies to the withholding tax payment. Please note that the filing deadline is likely to be determined following a 2-month notice period imposed by the Belgian Companies Code (no repayment of capital can occur within the timeframe of two months from the date of publication of the shareholders’ decision to reduce the capital in the annexes to the Belgian Official Gazette). 

Shareholders will need to be aware of the tax treatment of the capital reduction at the level of the distributing company to permit them to be fully compliant with their own tax requirements. This may lead to practical issues, in particular in the event of a capital repayment by a foreign company.

Corporate shareholders 

Corporate shareholders will be required to include the portion of the received capital repayment that qualifies as a dividend for tax purposes, in their corporate income tax return, but can, subject to compliance with the applicable legal provisions, apply the participation exemption. To claim this 100% dividend received deduction, the conditions are a minimum participation of 10% or purchase value of at least €2.5 million and a holding period of at least one year. 

The withholding tax applied (if any, subject to applicable exemptions) can be deducted from corporate tax due or can be refunded to the company in case of loss carry forward.

Shareholder-individual

On capital repaid to shareholders that are individuals, a 30% withholding tax will be applied (subject to applicable withholding tax reductions) on the portion of the capital reduction that is deemed to be a dividend for tax purposes.

Given that a withholding tax is levied at source, the beneficiary of the repaid capital will be free from further filing obligations with respect to the amount received. 

The described tax regime applies to capital reductions decided by general meetings held on or after 1 January 2018.

The current tax regime applicable to capital reductions is considered as one of the compensatory measures for the reduction of the statutory corporate income tax rate adopted under the recent Corporate Tax Reform Act.

In the explanatory memorandum to the tax legislation, it is stated that the objective of the tax reform was to ‘aim for a simplified tax system with a higher degree of fairness and legal certainty'. It is fair to say that the objective of simplification has not been achieved and expectations are that the new tax regime for capital reductions will lead to an increase of erroneous tax filings. 

However, the impact of this new measure will probably be limited for SME companies that have previously increased their capital via the article 537 CIT route and/or are applying the regime of liquidation reserves. It should be noted that companies that suffer losses will not be affected by this measure. 

If you want to have more information, please contact Michel Beyaert, Tax Partner.