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Three tax reasons for opting for the CAC before 1 January 2020

Tuesday 24/09/2019
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On 1 May 2019, Belgian company law was comprehensively overhauled by the phased introduction of the Companies and Associations Code ("CAC"). In this article, we outline several good reasons for voluntarily opting for the application of the CAC before 1 January 2020, from a tax perspective.

"Capital reduction"

The CAC has abolished the capital requirement for a number of company forms. Since, from a company law perspective, there is no longer a minimum capital requirement for these types of companies, owners might consider paying out the amount of the previously paid-up capital (tax-free).

From a fiscal perspective, the concept of 'capital' has not disappeared. Whereas, from a company law perspective, the concept of capital has been abolished, a separate definition of the concept of 'capital' has been introduced for tax purposes, i.e. "equity capital (...) insofar as it is constituted by contributions in cash or in kind, other than contributions in industry".

The capital previously contributed to the company can therefore be withdrawn tax-free below the minimum capital requirement as soon as the articles of association have been adapted to the CAC.

However, there are a few things to bear in mind:

  • Since 1 January 2018, a fiscal capital reduction has meant that a fiscal dividend will also be paid out pro rata, and this dividend will also have to be subject to withholding tax (in principle 30%) (primarily if the beneficiary is a natural person). Only in specific circumstances will no withholding tax be payable, for example if the capital reduction relates to 'liquidation reserves' (art. 537 ITC 92) or if the other reserves consist exclusively of, among other things, tax-exempt or liquidation reserves...
  • If, as a result of the capital reduction, the equity is less than twice the investment value of the shares held by the company (investments in shares, SICAVs, etc., or subsidiaries where the company holds less than 75% of the shares), the company will no longer be eligible for the reduced corporate income tax rate (20.40% on the first tranche of €100,000 instead of 29.58%).
  • It is also advisable for the company to have sufficient funds to pay out the capital reduction (in cash or in kind). Some case law states that the interest on a loan to pay out a capital reduction/dividend payment is not deductible. However, this case law must be put in the right context: in specific circumstances, these interests are deductible.
  • For companies that qualify for the VVPR bis arrangement (only 15% or 20% instead of 30% withholding tax on dividends) there is currently uncertainty as to the capital requirement.
    • For companies set up from 1 May 2019 or shares relating to a capital increase as of 1 May 2019, there is no doubt: if all other conditions are met, the dividend payments relating to these shares will be eligible for VVPRbis.
    • For incorporations and capital increases between 1 July 2013 (start of this VVPRbis arrangement) and 30 April 2019, the situation is unclear. Indeed, during this period, one of the conditions for the VVPRbis arrangement was that the company had to have a minimum capital of €18,550.
      • If the company was previously eligible for the VVPRbis arrangement and does not reduce its capital, it will of course continue to be eligible for the VVPRbis arrangement.
      • If the company was previously eligible for the VVPRbis arrangement and reduces its capital to less than €18,550, it is uncertain whether the VVPRbis scheme will continue to apply (on the basis of the letter of the law, this arrangement may seem to be redundant, but there are also other opinions in the case law).
      • If the company did not previously qualify for the VVPRbis arrangement, simply because it did not have a capital of at least €18,550, some argue that it would now qualify for the VVPRbis arrangement, but on the basis of the letter of the law this seems highly uncertain to us.

It would be useful if this could be clarified, but in the meantime we would postpone capital reductions in companies that qualify for the VVPRbis arrangement to an amount below €18,550 until there is more clarity.

Reorganisation of the management body

The CAC contains various mandatory provisions relating to management and decision-making in companies. The main focus point is that from 1 January 2020, a cumulative ban will be introduced in the sense that one person can no longer sit in the same administrative body in multiple capacities, such as, for example, in one's own name on the one hand and as permanent representative of a legal entity-director on the other. For more details in this regard, we refer to this article. 

In addition to the legal aspects, the tax aspects are also important in this respect.

Let's take the example of a natural person x who is both a director in his own name of company A and a permanent representative of a legal person-director B:

  • Management body company A
    • Mr/Mrs x
    • B, permanently represented by Mr/Mrs x

This kind of structure will no longer be authorised from 1 January 2020. A solution therefore needs to be found:

  • Option 1: Mr/Mrs. x resigns as a director in their own name. As such, the company law rules have been complied with, but what if Mr/Mrs. x also received remuneration or an attendance fee from company A? The remuneration or attendance fees must then be terminated and it must be further examined whether this remuneration or these attendance fees can be paid from another company in the group (provided that such services are actually provided by Mr/Mrs. x for the benefit of that other company).
  • Option 2: B, permanently represented by Mr/Mrs x resigns. What if B receives a management fee from A? Can the management fee be replaced in whole or in part by a service agreement between A and B?
  • Option 3: B replaces its permanent representative with Mr/Mrs Y. Mr/Mrs Y will then be liable under company law. If both Mr. Mrs. X and B (now permanently represented by Mr/Mrs Y) receive fees from A, they will have to keep the necessary documentation to prove the actual services rendered (after all, it is very difficult to argue that there is a fee for the services of Mr/ Mrs X in their own name on the one hand, and on the other hand a fee for (other!) services of Mr/Mrs X that are invoiced from B.

In other words, each group of companies must examine the inter-company invoices relating to management fees and directors' remuneration. In recent years, the tax administration has paid significant attention to this problem during tax inspections and does not hesitate (if the substantiation of the fees appears to be insufficient) to reject the costs (and to reclaim the deducted VAT) while at the invoicing company these fees remain taxed in full (economic double taxation).

Liquidation reserve

Small companies can set up a liquidation reserve. When the liquidation reserve is set up, an additional 10% corporation tax is paid, but if a dividend is paid out of this liquidation reserve after 5 years, only 5% additional withholding tax will be due (and in the event of liquidation, no additional tax at all). In comparison with the standard withholding tax rate on dividends of 30%, this is a nice option, although only if the shareholder is a natural person.

If the shareholder is a company, there is no point in creating a liquidation reserve. The dividend is taxed against the shareholder company in the corporate income tax or exempted from tax under the conditions of the dividend received deduction. The additional 10% corporation tax paid when the liquidation reserve is created cannot be recovered or set off by the shareholder company.

In a company where there are both shareholder companies and natural person shareholders, the latter will have an interest in establishing a liquidation reserve, while shareholder companies have no such interest.

The best solution is to only be able to build up liquidation reserves in proportion to the dividend rights of the natural person shareholders.

For example a company A with 2 shareholders who each own 50% of the dividend rights, i.e. company B and natural person x. Then the ideal solution would be that a liquidation reserve is created on only 50% of the profit after tax (before tax on the liquidation reserve) and that this liquidation reserve is only allocated (but not yet distributed) to a natural person X. The remaining profit is then exclusively allocated (but not yet distributed) to company B. Note that, as a result, an unequal distribution of profits occurs, namely half of the profit after tax before deduction of the tax on the liquidation reserve is allocated to B, and half of the profit after tax is allocated after deduction of the full tax on the liquidation reserve to X.

Questioned about this, the Minister of Finance referred to this uneven distribution of the dividend at the beginning of 2016, judging that the above method was not possible.

However, the introduction of the CAC has now made an uneven distribution of dividend rights possible. It may be stipulated in the articles of association that the profits will be distributed in accordance with the procedure described above, so that it can be decided to set up a liquidation reserve only for the dividends paid to the natural person shareholder.

Conclusion

The introduction of the new CAC also offers opportunities in the area of taxation, but ask the advice of a tax advisor in order to avoid the various tax pitfalls.

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An Lettens
An Lettens
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