Liquidation reserve: what is meant by five years?
November 2021 – When a company distributes a dividend, it is liable for a withholding tax (roerende vorheffing/précompte mobilier) of 30% on the amount distributed. SMEs can avoid this withholding tax by reserving their profits (liquidation reserve). An advance levy of 10% is then due immediately, but no further tax is due when the company is liquidated. In the event of a distribution before liquidation, however, a withholding tax will be withheld.
Early distribution
The liquidation reserve was introduced in 2015, when the withholding tax on liquidation surpluses was increased from 10% to 25%. At the time, it was common for entrepreneurs to see their company as a kind of savings that they could draw on when they retired. Not all profits were distributed, but hoarded via reserves. The 15% tax increase was a blow to many.
The government therefore introduced the liquidation reserve, which in practice leads to more or less the same result: instead of distributing a dividend (withholding tax: 30%), the company books the profit (part of the profit) in a separate reserve account. This transfer has a direct cost of 10%. This 10% is a kind of advance levy.
If the company does not touch this account again until the company is liquidated, then the distribution can be made completely tax-free.
In the event of a distribution before liquidation, an advance levy will be due. This withholding tax will be 20% in case of a distribution within five years and 5% in case of a distribution after the five year period.
The starting point of the five-year period is the last day of the taxable period for which the liquidation reserve was established.
Example
Your financial year ends on 31 March and at the general meeting in 2016 you decided to set up a liquidation reserve for the financial year ending on 31 March 2016. In this case, 31 March 2016 is the starting date of the five-year period ending on 31 March 2021.
An extended financial year
Company X establishes a liquidation reserve for the financial year from 1 April 2015 to 31 March 2016. In 2020, it extends its financial year by nine months. The 2020 financial year therefore runs from 1 April 2019 to 31 December 2020.
The question now is whether the five-year period runs from date to date (31 March 2016 to 31 March 2021) or from the end of the 2016 financial year (31 March 2016) to the end of the fifth financial year (31 December 2021).
This matter has been referred to the Ruling Committee.
Positive ruling for the interim dividend
The Ruling Commission examined the letter of the law and found that it only refers to five years, not five taxable periods or five financial years.
It concludes that the liquidation reserve that was built up on 31 March 2016 can be distributed at the 5% tax rate from 31 March 2021.
Since the financial year still runs until 31 December 2021, the company can only distribute the dividend after a decision of an extraordinary general meeting (which must take place after 31 March) and the dividend must take the form of an interim dividend booked after 31 March 2021.
In doing so, the Ruling Commission also implies that the rules of company law regarding the distribution of dividends in general, and interim dividends in particular, must be respected. Read: the intended distribution must pass the net asset test.
