Many small businesses have taken advantage of the possibility created in assessment year 2015 to set aside a liquidation reserve. A reserve of this kind allows you to take surplus cash out of your business at a lower tax rate.
How it works
If your company pays a dividend to shareholders (who are natural persons), that dividend is in principle subject to withholding tax at the rate of 30%. By setting aside a liquidation reserve, ‘small’ companies* are able to pay dividends that are taxed at a lower rate.
A small company can set aside a liquidation reserve each year from the post-tax profits for the financial year in question. A special corporation tax charge of 10% is payable on the reserve that has been constituted.
Profits after tax amount to 110 euros.
The maximum liquidation reserve that can be constituted is 110/1.1 = 100 euros.
The amount of tax payable is 10 euros.
After a waiting period of five years, the liquidation reserve can be distributed to shareholders subject to deduction of 5% withholding tax.
The liquidation reserve of 100 euros is paid out after 5 years.
The shareholder will receive a net dividend of 95 euros.
The overall tax burden on distribution will in that case be just 13.64% [(10+5)/110], rather than the 30% payable on a normal dividend payout.
If the liquidation reserve is distributed when the company is liquidated, in principle no additional withholding tax at all needs to be paid. The total tax burden is then 9.09% [(10+0)/110].
* Within the meaning of Article 1:24, §§ 1–6 of the Companies and Associations Code
KBC Private Banking & Wealth is there to answer all your questions
- How do you determine whether your company qualifies as ‘small’ and what is the situation with affiliated and holding companies?
- How much can you put into the reserve?
- Is it interesting for all companies to set aside a liquidation reserve?
- What are the pros and cons of distributing a dividend by means of liquidation reserve as opposed to the reduced withholding tax scheme (VVPRbis)?
- Is it possible to set aside a liquidation reserve for previous financial years?
- Can you use the money in the liquidation reserve during the five-year waiting period to – say – make an investment?
- Will you have to take the double distribution test?
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