Do I pay less tax if I opt for the ‘liquidation reserve’ ?

Belgian companies currently pay a 25% corporate tax on their earnings (or 20% on the first €100,000 of taxable profit if they qualify as an SME) and an additional 30% withholding tax if they decide to distribute those after-tax profits as a dividend. Before, companies often used the liquidation procedure as an alternative to cash out their taxed earnings, as the liquidation tax was only 10%. Since 2014, the liquidation tax rate follows the standard dividend tax rate.

Aiming to reduce the tax burden on dividends, the so-called ‘liquidation reserve’ (LR) was introduced in 2015. This allows SMEs to set up a LR for their after-tax profits, so they can benefit from a more favourable tax treatment, instead of paying a hefty 30% tax rate.

The taxation occurs in two stages: (i) first, the company will pay an additional 10% corporate tax on its current-year after-tax BE GAAP profits that are to be transferred to the LR; (ii) how much tax is due after that depends on the timing of the dividend distribution from the LR:

  1. if the LR remains intangible on the company’s balance sheet until the company is liquidated, no additional tax will be due;
  2. if the company waits 5 years before distributing a dividend, it will only pay an additional 5% withholding tax;
  3. if the company distributes a dividend which is imputed on the LR, within the 5-year waiting period, the withholding tax will be 20% instead.

Since 2014 was the first year in which a LR could be created, 2020 was the first year in which your Belgian company could start distributing dividends at an additional cost of only 5%:

 Standard DividendLR: company liquidationLR: dividend AFTER 5 years  LR: dividend WITHIN 5 years  
After-tax profit€100 000€100 000€100 000€100 000
LR creation (10% taxation) n/a€9 091€9 091€ 9 091
reserved profit €100 000€90 909€90 909 €90 909
dividend€100 000€90 909€90 909 €90 909
withholding tax€30 000/  €4 545.45     €18 181.80
net result€70 000€90 909   €86 363.55    €72 727.20
tax liability30%9.09%13.64%27.27%

TAXPATRIA® can assist you with your business accounting and the various compliance formalities required in the context of creating a liquidation reserve.


What other topics would interest you?

Can directors claim a royalty from their company ?

In Belgian tax law, there is a very favourable tax regime for personal income resulting from the transfer or assignment of copyrights, provided that some specific conditions are met. While

What are the conditions for paying 20% corporate tax in Belgium ?

Belgium is known for having some of the highest income tax rates in the world. As part of the ‘tax shift’, the government has taken several steps in recent years

When should you start your own limited company ?

If you are running a business as a self-employed or sole trader, you have probably asked yourself at which point it is normally a good time to start your own