The Programme Act of 19 December 2014 (Official Gazette 29 December 2014) introduced a series of tax amendments and provisions that have already been commented on extensively. The introduction of the regime of the liquidation reserve obviously reinstates the possibility to immediately dissolve and liquidate a company at a 10% rate.
The withholding tax rate applicable to liquidation boni has increased from 10% to 25% as from 1 October 2014, in order to harmonise the various withholding tax rates. A transitional regime was put in place to enable taxpayers to enjoy the 10% rate on previously built-up reserves, provided that a series of conditions were met prior to effective distribution. Among the requirements was a mandatory waiting period of four years (for SMEs) or eight years (for other companies).
Alongside the existing VVPRbis regime, the Programme Act provides for a new possibility to qualify for a 15% withholding tax rate on dividend distributions , and also reinstates the possibility for taxpayers to dissolve and liquidate their companies at a 10% levying rate. Both options only apply to SMEs.
The difference from the previous regime lies in the anticipated or upfront manner in which the levy must be paid (prior to any dividend distribution to the shareholders). In order to achieve this, the concept of a "liquidation reserve" has been introduced in the company's accounting. The law also provides for a mandatory waiting period before the 15% rate can be enjoyed on dividends distributed by attribution to the liquidation reserve. This waiting period serves as a specific anti-abuse provision.
On the one hand, this new regime aims at encouraging the upfront and anticipated payment of 10% by imposing a five-year waiting period prior to finally applying the 15% rate. On the other hand, the new tax provisions were drafted in such a manner that it has again become possible, as of 1 January 2015, to dissolve and liquidate a company at a tax rate of 10%.
The legislator excluded the attribution of the liquidation reserve within the context of dissolution and liquidation from the characterisation as movable income. This means that no additional tax levy applies (neither a withholding tax, nor via the personal income tax return), provided that the liquidation reserve is distributed after the dissolution of the company (irrespective of the timing thereof after building up the reserve). The 10% upfront levy at the moment of transfer to the liquidation reserve is thus the final tax.
This new regime has the disadvantage that the 10% anticipated levy must be paid on the entire profit attributed to the liquidation reserve. Corporate shareholders will have no particular interest in building up such reserves, because they are usually not subject to any withholding tax (and even if no withholding tax exemption applies, they can usually net the levied withholding tax with their own corporate income tax). Therefore, corporate shareholders will see their net portion in the available reserves decrease as a result of the anticipated 10% levy when profit is attributed to the liquidation reserve. They cannot net this levy with their own corporate income tax. In addition, no "proportional exemption" is provided for corporate shareholders.
Because of this new regime, a qualifying company will have to carefully plan the transfer of its distributable profit in order to ensure that its shareholders will be able to benefit from the reduced rate on dividend distributions (e.g. the moment of the effective dividend distribution and possible dissolution in the near future). Furthermore, if the shareholdership includes both individuals and companies, opposing interests could arise at the general meeting of shareholders.