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Under current Belgian tax law, it is no longer possible to impute a capital reduction by way of repayment of capital solely on a company’s paid-in capital, which—depending on the factual situation—may result in a taxable event both at the level of the repaying company and at the level of the recipients.
The New Rule
Prior to 2018, total or partial repayments of the paid-up capital were not considered taxable dividends if they were made pursuant to a regular decision to reduce the company’s capital. However, any portion of a capital reduction charged to taxed reserves was to be treated as a dividend to the shareholders and, hence, triggered personal property withholding tax liability.
Moreover, the charging of any portion of the capital reduction to revaluation surpluses or previously untaxed reserves not only triggered taxation at the level of the company, but also in principle at the level of the shareholders (i.e., personal property withholding tax).
It was important, therefore, that the notary deed pertaining to the capital reduction indicated that the repayment of capital was charged, by priority, to the paid-up capital of the company (i.e., the capital from contributions plus issuance premiums incorporated in the capital). Without such a pro fisco clause, the validity of which was not contested, the tax authorities would allocate the repayment of capital proportionally to the paid-up capital, the taxed reserves and the previously untaxed reserves.
The Corporate Income Tax Reform Act of December 25, 2017 has codified this pro rata rule in the Income Tax Code (CIT): for capital reductions decided upon as of January 1, 2018 onwards, capital reductions by way of repayment of capital are deemed to relate proportionally to taxed reserves and certain tax-free reserves.
Tax-free reserves that are excluded from the pro rata imputation rule are, inter alia, tax-free reserves that are not incorporated in the share capital, the legal reserve up to the minimum required amount, the liquidation reserve, and the negative taxed reserve recorded as a result of a corporate restructuring. Withholding tax will then become due on part of the amount of the capital reimbursement that is deemed to relate to the (non-excluded) reserves as it qualifies as a dividend distribution (unless a withholding tax exemption applies).
Furthermore, this amount also qualifies as a deemed dividend in the hands of a Belgian shareholder. The rule, therefore, also applies to foreign companies having a Belgian shareholder.
The pro rata amount is obtained as a percentage that reflects the proportion between, on the one hand, in the nominator, the sum of the paid-up capital, the issuance premiums, and the profit shares assimilated to paid-up capital and, on the other hand, in the denominator, the sum of the taxed reserves, the tax-free reserves incorporated in the capital and the amount of the numerator. For this purpose, the amount of the reserves is determined at the end of the previous taxable period, reduced by the amount of any interim dividends distributed during the taxable period.
In a second step, the pro rata amount is imputed on, first, the paid-up capital (and assimilated items) (no corporate income tax, no withholding tax) and, second, on the reserves, in the following order:
(i) taxed reserves incorporated in the capital (withholding tax, unless an exemption applies);
(ii) taxed reserves not incorporated in the capital (withholding tax, unless an exemption applies); and
(iii) tax-free reserves incorporated in the capital (corporate income tax and withholding tax, unless an exemption applies).
Letter 2018/C/103 of August 2, 2018, providing the Belgian tax authorities’ guidance on the new rules, gives the following example (as derived from the Preparatory Works (Explanatory Memorandum) of the Act of December 25, 2017).
Assume a company with an initial paid-in capital of 1,000 proceeding to a repayment of capital of 400 in financial year N. The company has distributable reserves of 800 and untaxed reserves of 150.
For accounting purposes, the capital decrease in year N is fully imputed on the capital and the reserves remain unchanged, resulting in a capital of 600 (1,000 minus 400). For tax purposes, the paid-in capital is proportionally reduced, the balance being imputed on the reserves and being taxable as a dividend. In parallel, that part is included in the paid-in capital as negative reserve; from a tax perspective that reserve is considered as having been distributed, although for accounting purposes it is not distributed.
In the example, the part of the capital reduction that is imputed on the paid-in capital is:
(1,000 + 400)/[800* + (1,000 + 400)] = 63.60%
* Excluding the legal reserve of 50 up to the statutory minimum, i.e. 1,000 x 10% = 100.
In other words, the part of the capital decrease imputed on the paid-in capital (and amounts assimilated therewith) amounts to 63.60% of 400, or 255; whereas the part of 36.40% of 400, or 145, is imputed on the distributable reserves and is considered a dividend.
For tax purposes, therefore, the end situation of the capital amounts to 745 (1,000 minus 255), with a negative reserve in capital of 145 (400 minus 255). The imputation on distributable reserves has no corporate income tax impact on the distributing company (movement in taxed reserves = -145; distributed dividends = 145; tax base = 0).
Personal withholding tax is, in principle, due on 145 (unless an exemption applies).
In the hands of corporate shareholders, the 145 is included in taxable profits (as underestimation of the shares). Because this income corresponds to a received dividend, it may benefit from the dividends received deduction if application conditions are fulfilled.
Belgian corporations contemplating proceeding to a capital reduction by way of a repayment of capital, as well as their shareholders (Belgian or foreign, individuals or corporations), should thoroughly consider the new imputation rules prior to deciding on such operation.
Pascal Faes is Of Counsel with Antaxius Advocaten
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.