Belgian tax treatment of capital reimbursements as of 2018: is withholding tax due?
Prior to 2018, no withholding tax was due on capital reimbursements. The Corporate Income Tax Reform Act of 25 December 2017 has amended this rule. Capital reimbursements decided upon as of 1 January 2018 will be deemed to relate proportionally to taxed reserves and certain tax-free reserves.
As a result, withholding tax will become due on part of the amount of the capital reimbursement that is deemed to relate to these reserves as it qualifies as a dividend distribution (unless a withholding tax exemption applies). Since this amount also qualifies as a deemed dividend in the hands of a Belgian shareholder, the rule also applies to foreign companies having a Belgian shareholder.
Please note that the qualification as a deemed dividend distribution will no longer trigger the application of the fairness tax in the future since the Belgian Constitutional Court nullified the fairness tax in its entirety on 1 March 2018 as of assessment year 2019. Please find more information with respect to the Constitutional Court’s decision here.
How to determine which part of the capital reimbursement qualifies as a dividend distribution?
The amount of the capital reimbursement that is considered to relate proportionally to taxed and certain tax free reserves should be established as follows:
Step 1: determine the pro rata allocation by virtue of a percentage that is obtained via the following formula:
Numerator : Share Capital + share premiums assimilated to share capital + amounts
subscribed via profit participating certificates
Denominator: The amount of the numerator + taxed reserves (whether incorporated in the
share capital or not) + tax free reserves incorporated in the share capital
The measure is amongst others not applicable to tax-free reserves that are not incorporated in the share capital, the legal reserve up to the minimum required amount, the liquidation reserve and the negative taxed reserve recorded as a result of a corporate restructuring.
Step 2: determine the amount of the capital reimbursement that relates to capital based on the percentage determined in step 1: neither withholding tax nor corporate income tax is due on this amount
Step 3: determine the amount of the capital reimbursement that relates to the reserves in the following order:
- On the taxed reserves incorporated in share capital: withholding tax becomes due (unless an exemption applies)
- On the taxed reserves not incorporated in share capital: withholding tax becomes due (unless an exemption applies)
- Finally, on the tax-free reserves incorporated in share capital: corporate income tax and withholding tax becomes due (unless an exemption applies)
A company decides to reduce its capital for an amount of EUR 1,000.
|Share capital (not including any reserves)||5,000|
|Tax-free reserves incorporated in share capital||1,000|
|Tax-free reserve not incorporated in share capital||2,500|
Step 1: Percentage: 5,000
9,000 (5,000 + 1,000 + 3,000)
Step 2: Capital reduction that relates to share capital: 1,000 x 55.55%
Step 3: Capital reduction that can be fully imputed on taxed reserves: 1,000 - 555.55
What are the withholding tax obligations of a Belgian company upon payment of the capital reimbursement?
As mentioned above, withholding tax should in principle be withheld by a Belgian taxpayer upon attribution or payment of part of the capital reimbursement that qualifies as a dividend distribution. In addition, the relevant forms need to be filed within 15 days as of the attribution or payment. The withholding tax rate equals 30% according to Belgian domestic law. However, various exemptions (or reductions) apply based upon Belgian domestic law, a double tax treaty or an EU Directive. It is therefore necessary to carefully examine whether an exemption (or reduction) can be relied upon in a specific case and what conditions need to be fulfilled. In order for an exemption to apply, it may be required that the beneficiary provides the debtor with a certificate confirming the conditions are met.
Note: Further to the ‘Tate and Lyle’-case of the European Court of Justice and the recent changes to the participation exemption regime, the Corporate Income Tax Reform Act of 25 December 2017 also introduced a new exemption of withholding tax. The exemption applies to dividends paid by a Belgian company after 1 January 2018 to a company established in the EEA or in a country with which Belgium has concluded a double tax treaty that foresees the possibility to exchange information provided the following conditions are met:
- The exemption is only applicable to the extent that the Belgian withholding tax cannot be credited or is not refundable in the beneficiary’s jurisdiction.
- The beneficiary must be a non-resident corporate shareholder having a holding in the capital of the distributing company of less than 10% but with an acquisition value of at least
- The holding is or will be maintained for an uninterrupted period of at least one year in full ownership.
- The shareholder must have a legal form as mentioned in the EU Parent-Subsidiary Directive or a similar form.
- The shareholder is subject to a corporate income tax or a similar tax and does not benefit from a regime that deviates from the common tax regime.
- The distributing company has a certificate confirming that the various conditions are met.
How to avoid double taxation upon a later dividend distribution?
In order to avoid that reserves are subject to a double taxation (i.e. at the occasion of a capital reimbursement and at the occasion of a later distribution of reserves), an exemption of withholding tax is introduced for dividends that are distributed out of reserves that have previously been subject to withholding tax upon a capital reimbursement. However, distributions are allocated first to those reserves which have not yet been subject to withholding tax.
For more information on the Corporate Income Tax reform, reference is made to our Corporate Income Tax Reform brochure.