Liquidation advance and liquidation reserve
Before we consider this ruling in more depth, a word of explanation about these two terms.
If the share capital of a company is distributed upon termination, the settlement and the dissolution or liquidation can be carried out in one deed at the same time. It may happen, however, that the two are separated into two deeds. An advance may be paid pending the final liquidation, and this is an advance on the liquidation payment - or the liquidation advance.
The regulation of the liquidation reserve stipulates that a company places the profit or part of the profit in a liquidation reserve. If this is held until the liquidation of the company, no additional withholding tax will be deducted.
What was the ruling about?
The Advance Decisions Department, in short the Ruling Commission, has judged in a ruling that no withholding tax should be withheld if a settlement is immediately followed by a payment of a liquidation advance that is charged against a liquidation reserve that was previously accrued (ruling no. 2020.1027 of 16 June 2020). This advance may not exceed the amount of the revalued capital and the accrued liquidation reserve, however. The Ruling Commission is also of the opinion that this practice does not constitute tax abuse.
What are the facts that gave rise to the ruling?
The situation that was presented to the Ruling Commission was quite specific:
The public limited company A NV had, in the past, set up a liquidation reserve within the meaning of Article 184quater of the Income Tax Code 92. At the time the question was submitted to the Commission, the company was considering liquidation. The company owned considerable liquidity and had no (relevant) debts. It was clear that the liquidation would take several years, as contractual agreements had been made with another party for the coming years, from which income could arise. The question was whether or not payment of a liquidation advance in the context of a liquidation would give rise to withholding tax if the advance were to be charged to a liquidation reserve that had been accrued in the past.
How does the Ruling Commission support its position?
In order to come to its position, the Ruling Commission had to first answer a number of questions.
Is there a legal basis for a gradual distribution?
The gradual distribution of the share capital is based on three legal grounds.
- The advice from the Commission of Accounting Standards, setting out the accounting process for the payment of an advance on the liquidation payment.
- Article 209 of the Income Tax Code 92, which explicitly addresses the possibility of a gradual distribution of the share capital.
- The fact that the Tax Administration explicitly acknowledges the existence of this technique in its Comments.
How is a liquidation advance taxed in case of a gradual distribution?
To answer this, the Ruling Commission refers to a previous position. In this, it ruled that the granting of a liquidation advance should be regarded as a definitive dividend payment,on which withholding tax must be paid. Article 269, §1, 8° Income Tax Code 92, which refers to ‘dividends, other than intended under Article 209 Income Tax Code 92,’ confirms this.
But what happens if the advance is charged against a previously accrued liquidation reserve?
If a liquidation reserve is only paid out at the liquidation of a company, no withholding tax is due. The Ruling Commission continues along this line in a sense, and is of the opinion that no withholding tax is payable if a liquidation advance is paid in the context of a prolonged liquidation/distribution, and if that advance can be charged against such a previously accrued liquidation reserve.
The Commission bases itself on Article 209 Income Tax Code 92, which states that payments in the context of a distribution of the share capital are, from a tax perspective,successively considered to arise from the components of the shareholders’ equity, starting with the paid-in capital and the liquidation reserve.
Although a liquidation advance is, in principle, subject to withholding tax on the basis of Article 269, §1, 8° ITC92 (see above), in this specific case such an advance is given the tax meaning of Article 209 ITC92 if it is charged against a previously accrued liquidation reserve. As a result, the effect of Article 269, §1, 8° ITC92 and the associated withholding tax is de facto set aside.
Why is tax abuse not an issue here?
In this specific case, the applicant had good arguments to justify why the liquidation would take several years, and that liquidation and dissolution in one deed was therefore not possible.
Company A NV was a ‘single purpose vehicle’ through which land was purchased with a view to the development and realization of a residential project, the housing units of which would subsequently be sold. An independent and unforeseen bid on the project land, however, had a decisive effect on the further course of the project. Due to this change in the course of the project, the duration of the liquidation depended on the processing of the contract with the buyer of the land.
Avoid quick generalisation
We would like to add a critical note, in particular with regard to this specific case. The question could be raised as to whether the Ruling Commission would have ruled in the same way if there were no ‘economic motives’ available to justify why the liquidation could not be immediately finalised.
In other words, can we conclude without any doubt that the technique by which a liquidation is implemented and is immediately followed by the payment of a liquidation advance that does not exceed the amount of the revalued capital and the accrued liquidation reserve will always be without (negative) tax consequences? We can’t be sure yet.
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