We are once again entering the final month of the year, and for most companies that also means the last month of the financial year. This is when there is still enough time to optimise numerous issues before the financial year effectively concludes. In this series we will shed light on a number of potential techniques for tax optimisation.
As you will already have heard on multiple occasions through the media, the withholding tax is set to increase to 30 percent as of 1 January 2017. Should this have been part of an overall reform of corporation taxation, with the nominal rate decreasing, the move would have been a completely defensible one. But because any reforms have been provisionally postponed while the withholding tax is still to be raised, all that remains of the overhaul can only be described as a tax increase for all persons receiving an income from moveable property, with the exception of interest from savings deposits that have exceeded the exempted sum. This increase in the withholding tax will in all probability be introduced as of 1 January 2017.
2. Withholding tax on interest
The increase in withholding tax will thus be applicable to all interest that is payable or available as of 1 January 2017. When it comes to tax optimisation this means it is best to be prepared. You can start by inputting the movements for your current account or loans into the programme or on the Excel sheet you use to calculate interest, insofar as they are already known (current account) or can be predicted (loan repayments). In this way, on 31 December you can still include the final transactions and enter the interest on 31 December 2016. Then you have until 15 January 2017 to do your withholding tax return for the interests and to pay the associated tax at the current rate of 27 percent.
3. Withholding tax on ‘standard’ dividends
The same applies to dividends, for which the withholding tax is likewise set to rise to 30 percent. Companies that are unable to utilise the reduced rates under the so-called VVPRbis regime (on dividends from certain SME stock) or the liquidation reserve will benefit from paying out interim dividends at 27 percent withholding tax this December.
The government is actually banking on this! A portion of the anticipated revenue is allocated to the withholding tax for 2016 in the hope or expectation that many taxpayers who are anticipating the increased withholding tax will pay out interim dividends in 2016.
4. Withholding tax under the VVPRbis regime
Companies that can use the VVPRbis regime will in most cases receive a preferential rate, given that these rates are not set to change. It is only those dividends paid out from the profit appropriation for the year in which the company was established or its capital was increased, and those dividends paid out from the profit appropriation for the following year that are subject to standard rates, which will rise to 30 percent as of 1 January 2017.
So what is the VVPRbis regime? The VVPRbis regime applies to companies that have been formed after 1 July 2013 or have engaged in a capital increase since that date by issuing new registered shares. The contribution must be represented by a monetary contribution and cannot be preceded by a capital reduction. There are of course a number of other conditions that must be met before a company can apply the VVPRbis regime, and if you have any practical questions or require further information, please don’t hesitate to contact us!
If a company falls under the VVPRbis regime, this means it can enjoy lower withholding tax rates, aside from for the two first aforementioned financial years. For financial year 3 (i.e. the second financial year following the financial year in which the company was established or the capital increase took place), dividends can be paid out at 20 percent withholding tax, and from the next year on even at 15 percent withholding tax. The law states that the preferential rates apply to dividends paid out ‘from the profit appropriation for the … financial year’. However, we have received an internal communiqué from the tax authorities in which they confirm that dividends from the financial year can also be paid out at the preferential rates.
5. Withholding tax under the liquidation reserve
When it comes to the liquidation reserve, which can be created by small enterprises pursuant to article 15 of the Companies Code, the rates will be changing. Within the frame of the liquidation reserve a small company can transfer all or a part of its profits to a separate liquidation reserve account. Over and above the corporation tax, such a company will also pay a separate ten percent levy on the accretion of the liquidation reserve. The fact that ten percent has already been paid in advance means that the later payout of this reserve will be subject to a preferential rate – 17 percent withholding tax if distribution occurs within five years, 5 percent if distribution occurs over five years after the creation of the reserve, and if it is the result of a liquidation, then no withholding tax whatsoever has to be deducted and paid.
The 17 percent rate in the event of distribution within five years will now be 20 percent for the reserves created as of the 2018 tax year – i.e. for all financial years starting after 1 January 2017. This naturally means that there is an additional opportunity for optimisation, because if you wish to pay out an ordinary dividend on the results for the 2016 financial year (2017 tax year), then this shall only occur in 2017 during the ordinary general meeting. This dividend is then rendered payable in 2017 and shall be subject to the 30 percent withholding tax rate. However, if the general meeting decides not to distribute an ordinary dividend but rather to create a liquidation reserve, then a ten percent levy must be ‘immediately’ paid on it. In this case ‘immediately’ does not really mean immediately, because even though this ten percent must be immediately recorded in the books, it will only be effectively payable once you receive your assessment notice – most probably during October or November 2017. But this liquidation reserve is created in the 2016 financial year – the 2017 tax year – and if distributed within five years it will still be subject to a 17 percent withholding tax rate instead of the 20% withholding tax.
A few weeks later you can convene an extraordinary general meeting at which it is resolved to pay out an interim dividend from the liquidation reserve created in the 2017 tax year/2016 financial year (if, of course, there are no older liquidation reserves). Then only 17 percent withholding tax is payable on that, given that the reserve is distributed within five years.
The total cost of this distribution – let’s say you have 100 euros profit after taxes, you can place 90.91 euros in the liquidation reserve, for which you pay a separate levy of 9.09 euros (ten percent of the creation of a liquidation reserve of 90.91 euros, plus 9.09 euros comes to exactly 100 euros). When distributing it you will have to pay a further 17 percent, but only on the 90.91 euros that you are paying out. This means you only pay 15.45 euros, bringing the total cost to 24.54 euros – a saving of 5.46 percent in respect of the ordinary dividend at 30 percent withholding tax.
So it will be a win-win situation to properly anticipate the withholding tax increase. You save on the withholding tax and the authorities will in certain cases still receive additional revenue this year, a factor they have already taken into account in their budget audit.