The acquisition of own shares by a company followed by their cancellation is taxed as a fictional dividend for tax purposes. However, in certain cases, applying this fiction leads to an unfavourable outcome for the company. In a recent case, the Court of First Instance of East Flanders, Ghent Division, has referred a question to the Constitutional Court for a preliminary ruling.
Why is there a fictional dividend?
When a company acquires its own shares (as a result of a buyback or merger), it is required under corporate and accounting law, to create a non-distributable reserve equal to the value of the acquired shares. If the company subsequently cancels these shares, this non-distributable reserve also has to be written off.
The write-off reduces the company’s reserves, a movement that, in principle, has the effect of lowering the taxable result (because taxable profit is initially calculated by looking at movements in reserves between the beginning and end of the taxable period). The same applies in cases where the non-distributable reserve resulting from the acquisition is directly charged to the P&L account owing to there being insufficient available reserves (said reserve was created in a tax-neutral fashion, exactly the same as where available reserves are utilised, because the expense is offset by the increase in the reserve account). However, the tax legislator is of the opinion that the acquisition of own shares followed by their cancellation should be fiscally neutral for the company. To make sure of this, we have the tax fiction in article 186, second paragraph, 3°, ITC92: in order to avoid diminution of the tax base (due to the non-distributable reserve being written off), a fictional dividend is accounted.
The purpose of this provision is to ensure that the operation of acquiring and cancelling of own shares does not, in principle, result in a tax charge in the company’s hands and that it also does not procure any fiscal advantage for it. It was clearly not the intention of the legislator to create taxable substance in the hands of the acquiring company. The legislator aimed for this situation of acquiring and cancelling of own shares to remain fiscally neutral for the company. Article 186, second paragraph, 3° CIR92 is therefore merely a corrective mechanism to guarantee this fiscal neutrality for the company.
But: the fiction doesn’t always procure neutrality
Some situations fall short of the fiscal neutrality goal.
For example, if, in breach of the accounting rules, a non-distributable reserve does not get created, the cancellation of the shares then has no impact on the result, since there is no non-distributable reserve that can be written off. Nevertheless, the tax authorities assert that, even then, the tax fiction contained in article 186, second paragraph, 3°, ITC92 is of full force and effect, resulting in the company being taxed on the full fictional dividend. In that case, the tax fiction clearly does not have the set-off effect intended by the legislator and, hence, does not procure a state of fiscal neutrality.
Companies whose acquisition and cancellation of own shares has no impact on the tax base (and are therefore already fiscally neutral) are in a fundamentally different situation from those whose transactions do indeed affect their tax base. The legislator only intended the fictitious dividend to function as a corrective mechanism for the latter, so as to achieve fiscal neutrality for the transaction. Nevertheless, the fictional dividend is applied in full in both situations as no specific arrangement is set down in the legislation to cater to the former. Such oversights arise with regrettable frequency, as it happens…
In certain cases, where the law remains silent, the tax administration has been obliged to fill in the gaps itself, such as with the tax treatment of a reversal of impairment on repurchased own shares. According to a strict reading of the old article 74 RD/ITC92 (now article 206/1 ITC92), it was only tax-exempt if the impairment was initially taxed as a disallowed expense under article 198, §1, 7°, ITC92, even though that clearly wasn’t the intention of article 24, first paragraph, 3°, ITC92, under which a tax charge was only triggered on a reversal of impairment that had previously had a substantive impact on the taxpayer’s taxable result (rendering it fiscally “recognized”). An impairment on repurchased own shares, by contrast, is already taxed as a distributed dividend (and, according to the tax administration, not additionally as a disallowed expense, as that would result in a double tax charge). Despite the situation not being explicitly provided for in the Income Tax Code, the Secretary of State confirmed in 2006 that the reversal of impairment on repurchased own shares could be tax-exempt in the same way.
However, no such requisite clarity has been proffered by the tax administration in the aforementioned situation (where no non-distributable reserve has been created and no dividend fiction is needed to achieve fiscal neutrality).
The Constitutional Court steps in
In an interim judgment of 29 September 2025, the Court of First Instance of East Flanders, Ghent Division, followed the argumentation of our firm’s tax litigation team and ruled that article 186 ITC92 might indeed be in breach of the Constitution on the ground that taxpayers who, in light of the purpose of that provision, find themselves in fundamentally different situations are treated in the same manner in terms of the fiction provision, without a reasonable justification.
It is now up to the Constitutional Court to rule on this issue. To be continued, without a doubt…
