Dividend payout from the liquidation reserve:stick to the rules of the game.
The liquidation reserve was introduced by the Programme Law dated 19 December 2014, which stipulates that small companies can transfer their profits to a liquidation reserve. In the event of liquidation, they can pay it out more cost-effectively, i.e. without any withholding tax being deducted from it. Earlier dividend payments will also be taxed at a lower rate than distributions from an ordinary reserve.
How exactly does the liquidation reserve work?
Instead of distributing the profit for the financial year after tax, companies reserve the profit in a specific reserve, a so-called liquidation reserve. When the reserve is established, they immediately pay 10% tax (after payment of corporation tax). After 5 years, the company may decide to distribute a dividend from this liquidation reserve, on which it then only has to pay 5% additional withholding tax. If the company waits until the effective liquidation, the aforementioned 10% will be final and no additional withholding tax will be due.
Who would benefit from a liquidation reserve?
Small companies and SMEs in particular stand to benefit from the liquidation reserve scheme. It is interesting for companies that cannot make use of the VVPR bis scheme [1] (dividend payment at 15%) or that are eligible for it, but would like to build up a pension pot with a final assessment of the payment at 10%. For shareholders-natural persons, this arrangement offers a great opportunity as the standard rate of withholding tax on dividends is currently 30%.
For shareholder companies, the creation of this type of liquidation reserve offers no added benefits. The dividend paid by the shareholder company is taxed in corporate income tax unless it can be exempted under the DBI-deduction (Definitively Taxed Income). Moreover, the 10% additional tax cannot be recouped or offset by the shareholder company.
Dividend payment after five years:is it really down to one day?
The liquidation reserve scheme was introduced for financial years ending 31 December 2014 at the earliest. In order to benefit from the reduced rate of 5% withholding tax on a dividend distribution, a 5-year waiting period had to be observed. This five-year period consequently expired for the first time on 31 December 2019. As from 1 January 2020, the first dividends from the liquidation reserve can be paid out at the beneficial rate. However, observing a five-year waiting period is not always feasible in practice. As illustrated by the following example.
Company X keeps accounts per calendar year. In the 2014 financial year, the company created a liquidation reserve for the first time, i.e. the booking was made on 31 December 2014. At the annual general meeting for the 2019 financial year, which is set to take place in 2020, it will be decided to distribute a dividend from the liquidation reserve established in the 2014 financial year. In practical terms, this means that for the year-end transactions on 31 December 2019, the liquidation reserve will be transferred to the account 'dividend payable - liquidation reserve 31-12-2014'. Interpreting the rule to the letter, the liquidation reserve would be accessed within the 5-year period, i.e. just one day early.
Minister of Finance is flexible
A similar case was presented to the (then) Minister of Finance. He adopted a more flexible approach and stated that the dividend distribution was subject to only 5% withholding tax. In his opinion, the transfer did not infringe the condition of inviolability.
The tax authorities are not always flexible
Despite the Minister's affirmation, we would advise you to be vigilant. After all, what if the tax authorities follow the letter of the law and decide that the inviolability condition, i.e. a waiting period of exactly 5 years, has not been complied with? In that case, the favourable rate of 5% does not apply to the dividend payment.
Play it safe with an extraordinary general meeting
If you want to play it 100% safe, we would advise that you decide against a dividend payment from the 2014 liquidation reserve at the ordinary general meeting held in 2020 for the 2019 financial year.
It should be settled during an extraordinary general meeting, also in 2020, but after the ordinary general meeting, during which you decide on an interim dividend. The booking of this kind of interim dividend payment would not take place on 31 December 2019, but at the time of the decision in 2020, in which case the 5-year waiting period will be 100% observed. This dividend will be included in the figures for the 2020 financial year.
Remember to file a withholding tax return and pay the additional 5% tax within 15 days of the dividend having been allocated or made payable.
Dividend distribution by BVs and CVs
Since 1 January 2020, the mandatory provisions of the Companies and Associations Code apply to every private limited company (BV) and cooperative society (CV). A former bvba (private limited liability company), which has not yet adapted its articles of association to the new company legislation, is also covered by these provisions. One of the consequences of this is that any distribution from the assets of these types of companies must be subject to a double distribution test: a net assets test and a liquidity test.
Net assets test
The administrative body must verify that the net assets of the company are not negative, or do not become negative as a result of this distribution. Even if the ordinary or extraordinary general meeting decides in 2020 to distribute the 2014 liquidation reserve as dividend, a double balance sheet test needs to be carried out. The net assets test must take place prior to the general meeting at which the shareholders decide to distribute the liquidation reserve. If the outcome of the net assets test is favourable, the shareholders can decide to pay out.
Liquidity test
However, if a decision is taken to pay out, the administrative body cannot simply make the payment. It must first check that the company remains able to pay its debts on the basis of reasonable expectations as they become due over a period of at least twelve months after payment. This liquidity test must be carried out at a time as close as possible to the date of payment and at the latest on the date of payment itself.
Mandatory reporting
The results of both tests must be recorded by the administrative body in a special report. If the dividend is payable at the same time as the date on which it is granted, the reports for both tests must consequently be available prior to the date of the general meeting.
Directors shall be responsible for this double test and may be held jointly and severally liable in the event of overpayment or failure to comply with the tests and reporting obligations.
Dividend payments during the Corona crisis
Impact on advance payments
Numerous support measures have been adopted in recent months at both federal and regional level. Among other things, the government decided to increase the percentages of the benefits of the advance payments of the third and fourth due dates. Postponement of advance payments is therefore less disadvantageous.
However, there are conditions attached to this advantage. The measure is intended for companies with liquidity problems. Not included are companies that buy back their own shares or make a capital reduction. Or companies that pay or allocate dividends between 12 March 2020 and 31 December 2020, including distribution from the liquidation reserve.
Carry-back scheme
A law is currently being drafted to assist companies facing losses during this Corona crisis. The intention is to give these companies two options to restore their equity as soon as possible by means of a one-off early loss deduction or carry-back scheme.
Please note that companies that in the period from 12 March 2020 up to and including the date of filing the corporate income tax return for the 2021 tax year, have, among other things, distributed dividends, including distribution from the liquidation reserve, shall be excluded from the carry-back scheme.
For further details on these new measures please refer to the article entitled New measures to support company liquidity and solvency.
Our Frequently Asked Questions sectionon the consequences of the Corona crisis for your company also provides a lot of useful information.
[1] VVPR = Reduced Withholding Tax Précompte Réduit
