Dividends – they should be a simple matter, but it is not always easy as a small company to see the forest for the trees. Ordinary dividends, VVPRbis dividends, liquidation reserves... do you know the differences between them all and what to look out for?
1. Ordinary dividends
Ordinary dividends are dividends that are distributed by the general meeting. There are three types of ordinary dividends. Firstly, we have the ordinary annual dividend. An annual dividend is decided on by the ordinary general meeting at which the profit distribution for the preceding financial year is discussed. The results for that financial year can either be set aside in the company or paid out as a dividend (or as a profit-sharing bonus, an option that we will discuss in greater detail in a future article). This dividend can only be granted once a year.
We also have interim dividends, which are dividends that can be paid out during the financial year and which require a resolution by the extraordinary general meeting. An extraordinary general meeting is a general meeting of shareholders that does not decide on the approval of the annual financial statements.
While interim dividends are not expressly governed by company law, a number of years ago the Court of Cassation confirmed that, subject to specific conditions, a general meeting can decide at any time to pay out a dividend from the available reserves. Naturally, the restrictions that likewise apply to ordinary dividends must also be applied to interim dividends (restrictions to the distributable reserves with regard to, for example, restructuring costs that have not yet been written down). However, the fact that the Court of Cassation only referred to the available reserves does not prevent the profit carried over from also constituting a part of an interim dividend distribution.
Moreover, the Accounting Standards Board (Commissie voor Boekhoudkundige Normen) states that it is not appropriate to distribute an interim dividend between the time at which the financial year is concluded and the ordinary annual general meeting that decides on the approval of the annual financial statements for that year. This is because, should this be done, one cannot take into account the profits for that financial year (as they are not yet distributed). One could face a situation where an interim dividend that is distributed after the conclusion of the financial year but before the annual financial statements are approved does not reflect the actual condition of the company. The law also asserts that the distributable net assets must be determined on the date of the last financial year’s conclusion, and so as long as the net assets are not known, an interim dividend cannot be distributed.
Finally, we also have provisional dividends, which are considered to be an advance payment on the ordinary annual dividend and are thus paid out before the balance sheet for that financial year is approved. A provisional dividend can only be distributed for the profit of a current financial year and any profit carried over from past years that has not yet been reserved. Reserved profits can never be paid out as provisional dividends. However, in terms of company law, provisional dividends are only possible in public limited companies (naamloze vennootschappen) and limited partnerships (commanditaire vennootschappen), and only if the articles of association allow the Board of Directors to pay out provisional dividends.
As stated, the decision on paying provisional dividends is made by the board of directors, as opposed to the payment of ordinary and interim dividends, where the general meeting decides on the latest dividends to be distributed.
2. The standard rate – 30%
Dividends are non-deductible distributions of profit. That means that the distribution is performed from the after-tax profits and that the dividends have consequently been subjected to a degree of tax burden prior to being distributed. Most Belgian companies presently pay 33.99% in corporation tax. Certain companies are able to enjoy a reduced progressive rate, but in order to be eligible for it, certain conditions must be satisfied, including the fact that the distributed dividends cannot amount to more than 13% of the fiscally paid-up capital. In order to avoid further complications in this article, we will not pay any further attention to the reduced rates.
After the corporation tax of 33.99%, the dividend must also be subjected to withholding tax. If the dividends are paid out to a natural person, the company shall have to deduct the withholding tax and pay it to the state within 15 days of the dividend being awarded or declared payable.
The standard rate for withholding tax is 30% as of 1 January 2017. So a pre-tax profit of 100 euros can be distributed, after payment of 33.99 euros in corporation tax, as a dividend with 66.01 euros remaining. Thirty percent of this payment of 66.01 euros must be deducted and paid to the treasury, resulting in just 46.21 euros net left over in the shareholder’s account. That means a total tax burden of 53.79%!
3. The VVPRbis – rate
Fortunately there are a number of options for sidestepping this heavy tax burden. The first involves the application of the VVPRbis regime. Companies that have been formed after 1 July 2013 or have engaged in a capital increase since that date can, under certain conditions, distribute dividends at reduced rates on those shares issued since then. The financial year in which the company was formed or in which the capital increase took place as well as the following financial year keep the normal rate (at present, 30%), but the second financial year following on from the formation or increase has a beneficial rate of 20% while the third financial year (and the following financial years) have a beneficial rate of 15%. The VVPRbis regime is a beneficial rate for withholding tax on dividends that are distributed under a resolution of the ordinary or extraordinary general meeting – i.e. the ordinary dividends, the interim dividends and even the provisional dividends. However, this beneficial rate does not apply to liquidation dividends or interest reclassified in dividends. All the conditions must naturally be satisfied. We will be happy to refer you elsewhere with regard to the conditions for the VVPRbis regime.
Should you be able to obtain the beneficial rate of 15%, then the total cost price for the dividend decreases. If 66.01 euros in distributable reserves is distributed then, after the deduction of the 15% withholding tax, 56.11 euros remains, which means the tax burden has decreased from 53.79% to 43.89% - a drop of nearly 10%.
4. The liquidation reserve
Small enterprises that cannot use the VVPRbis regime (because they do not meet all the conditions) could possibly still use the liquidation reserve regime. Once again, we are not going to scrutinise all the conditions for the liquidation reserve, and we will be happy to refer you to other publications to check these. The liquidation reserve regime entails the profit for a financial year not being distributed, but instead being reserved in a specific sub-account of the taxed/available reserves (with the name of that sub-account referring to the liquidation reserve regime).
In tax terms, the after-tax profit (which has already been subjected to 33.99% tax) is allocated to this liquidation reserve account. But over and above that corporation tax, the increase to the liquidation reserve is additionally taxed at a rate of 10%, which means that you immediately pay a further 10% in tax.
However, when this liquidation reserve is distributed, you enjoy a reduced withholding tax. If the liquidation reserve is paid out when the company is in liquidation, you are not required to pay any withholding tax, and if you pay it out 5 years or more after the creation of this reserve, the withholding tax is just 5%. Only in the event that it is distributed within 5 years of its creation will you have to pay compensation up to the standard rate. For liquidation reserves created in the financial years up to the 2017 tax year (i.e. the financial years that have concluded up to 30 December 2017), you will then pay 17% withholding tax. The distribution of a liquidation reserve within 5 years of its creation, if the liquidation reserve was created for the 2018 tax year and following years, will be taxed at 20% withholding tax. The intention is that, together with the 10% already paid, the sum already known will be reached. But both the 10% as well as the 5% or the 17/20% are calculated on the net sums, which means that gains can be realised here too. See the following table.
5. The VVPRbis or the liquidation reserve regime?
Small companies can in principle always arrange to have the 30% withholding tax reduced to 15% or even 13.64%. In the event of the VVPRbis regime, distributions can always be performed at 15% as of the third financial year following the capital increase or formation, while under the liquidation reserve version, for each creation of liquidation reserve one must wait 5 years before enjoying the beneficial rate.
So which should we choose if both the regimes apply? Should a company select the VVPRbis regime or the liquidation reserve? It’s not an easy choice…
But it is a very simple choice if a liquidation is planned in the (near) future. A medical doctor who is 60 years old and does not have an immediate need for money can best place all the profits into a liquidation reserve, even if the VVPRbis regime is available to him or her. At the time that the doctor decides to stop working and opts to liquidate the company, a major gain can be realised through that liquidation reserve. Meanwhile, under the VVPRbis regime the liquidation bonuses (all the distributions at the time of the liquidation over and above the paid up capital) are taxed at the standard rate of 30%. The reserves that are maintained at that time as a liquidation reserve and upon which 10% has thus already been paid, can be distributed without withholding tax being payable. That is a huge saving.
For companies that have no immediate plans for a liquidation and that can apply the VVPRbis regime, the answer to the question of which measure is best is a little more complicated. While savings of 1.36% can be realised by opting for the liquidation reserve (the difference between 15% withholding tax under the VVPRbis regime and 13.64% under the liquidation reserve scheme), the effective payment of the net funds can only be performed after 5 years and the 10% levy must also be paid immediately, which means that you are granting an interest-free loan to the state in exchange for 1.36% in savings.
You can of course opt to ‘grit your teeth’ for the first 5 years and place your profits each year in a liquidation reserve, paying 10% each time, and distributing the profits from 5 years ago each time as of the 6th year. This means that as of year 6 you can distribute a dividend annually at the beneficial rates, including the small saving of 1.36%.
But when you personally do not require any additional financial resources, or do not need them on a structural basis, then creating a liquidation reserve won’t bring you the greatest benefits even if there is a small amount of gain to be had. After all, you’re giving the state a nice advantage without any guarantee that you will later be able to use the advantage that you could enjoy. In that case it is better to distribute, at a time that you deem it necessary, an ordinary benefit, given that at that time you can still enjoy the reduced VVPRbis rates and only pay 15% withholding tax.
The above analysis is based on the present legislation. Amendments to the law can of course result in sea changes that will see the analysis likewise change.
Most small companies shall arrange their affairs in such a way that they escape the mega-rate of 30% withholding tax. For those companies that can apply both the liquidation reserve and the VVPRbis regimes, priority is in principle given to the VVPRbis regime, unless a liquidation is on the horizon. Should the client wish to distribute dividends on a structural basis, then a (minor) gain can be obtained from applying the liquidation reserve regime.