We assume you have already heard that the Belgian Government has increased the withholding tax on liquidation proceeds from 10 to 25% (Programme Act of 28 June 2013).
As you know, liquidation proceeds are the proceeds that are distributed to the shareholder upon the liquidation of his company (after settling the company’s debts) on top of the repayment of the paid-in capital. For many entrepreneurs liquidation proceeds thus constitute a sort of self- made pension reserve, the proverbial “rainy day fund”.
For these individuals, a sudden tax increase of 150% (from 10% to 25%) is certainly a very painful matter.
The only good news is that the Belgian Government has decided to have the new 25% rate only enter into force as of 1 October 2014.
As a result, many entrepreneurs – and certainly those who are nearing retirement age – have decided to make the best of a bad situation and liquidate their company at the 10% rate (and if necessary to keep on working for a few more years as a regular independent contractor afterwards).
For many others it will, however, not be possible to liquidate, for example, if such liquidation is difficult for operational reasons or because they are far from retirement age. For those entrepreneurs, the Belgian Government has provided a transitional regime whereby they can still benefit from the 10% rate on the reserves that are currently already present in the company and that remain invested in the company as “paid-in capital”.
More specifically, this transitional regime allows companies to distribute a dividend out of the built-up reserves of the company at the 10% withholding tax rate (which is payable straight away), provided the company immediately afterwards effects a capital increase by way of incorporating the net dividend proceeds in the paid-in capital of the company. By means of the incorporation the dividend (i.e. the distributed reserves) is converted into paid-in capital which can be distributed in a tax exempt manner upon liquidation of the company. As such, the 10% rate is paid in advance, so that the subsequent distribution of the amounts is tax exempt (upon liquidation or dividend distribution).
However, “locking” the 10% rate is only possible for taxed reserves that were present in the company at the latest on 31 March 2013 and have been approved by the shareholders’ meeting before that date.
Moreover, the transitional regime can only be applied insofar the increased capital is retained within the company for eight years (four years if the company qualifies as an SME). If the capital would be reduced within that eight (or four) year period, such distribution is qualified as a dividend distribution subject to additional withholding taxes.
Important to note is also the fact that the transitional regime may last until 30 September 2014. The incorporation into the paid-in capital, however, needs to take place at the latest during the taxable period closing before 1 October 2014. As such, there isn’t much time left: if the company’s accounting year coincides with the calendar year – which for many companies will be the case – the incorporation must be performed before 31 December 2013!
Whoever is contemplating taking advantage of the transitional regime does not have much time left to lose …
