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

Belgian companies currently paya 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.