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:
- if the LR remains intangible on the company’s balance sheet until the company is liquidated, no additional tax will be due;
- if the company waits 5 years before distributing a dividend, it will only pay an additional 5% withholding tax;
- 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 is the first year in which your Belgian company can start distributing dividends at an additional cost of only 5%:
|Standard Dividend||LR: company liquidation||LR: dividend AFTER 5 years||LR: dividend WITHIN 5 years|
|After-tax profit||€100 000||€100 000||€100 000||€100 000|
|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|
TAXPATRIA® can assist you with your business accounting and the various compliance formalities required in the context of creating a liquidation reserve.