17 May VVPR ‘bis’ regime also allows for reduced withholding tax for dividends stemming from retained earnings
Notwithstanding the fact that consecutive amendments have increased the dividend withholding tax – to a general 30% rate as from 1 January 2017 – options still remain available to distribute profits at more beneficial rates. One of those options is the VVPR ‘bis’ regime. Pursuant to this regime, dividends distributions made by small enterprises can benefit from a reduced withholding tax rate of 15% or 20% if certain conditions are met. The Minister now clarifies that this preferential regime can also be used to distribute dividends stemming from previously retained earnings.
In short: the VVPR ‘bis’ regime
In 2013, the legislator introduced a reduced withholding tax at a 15% or 20% rate (and similar separate reduced rates for personal income tax purposes) for dividends (other than those arising in case of a liquidation or redemption of capital) distributed by small enterprises and relating to new nominal shares remunerating new capital contributions. The measure was intended to stimulate capital contributions in SME’s in an attempt to stimulate the economy.
The reduced withholding tax rates only apply if the following conditions are cumulatively met:
- Small enterprise. The preferential regime only applies to dividend distributions made by enterprises that can be deemed small pursuant to article 15, §1 to 6 of the Belgian Companies Code. In order to assess the size of an enterprise, reference must be made to the tax assessment year in which the capital contribution (remunerated in shares to which the dividend relates) has been made. Hence, if a once small enterprise becomes a large enterprise in later years, it could still benefit from the preferential regime.
- New nominative shares. The dividend must relate to new shares that have been issued as from 1 July 2013. As a result, for example, shares issued prior to that date, shares held in dematerialized form or profit certificates do not qualify. Moreover, the shares can not be preferential, meaning they may not confer any benefits to the shareholder over the shareholder of other – previously existing – shareholders of the company concerned.
- Shares held uninterruptedly in full ownership. The shareholder who makes the capital contribution must continue to hold the shares issued in the event of the said contribution in full ownership. If the ownership over the shares changes, in principle the preferential regime is no longer available. Two exceptions exist to this rule: the reduced withholding tax rates are still available in the event of (i) transfers between relatives in the direct line of descent or between spouses as a result of succession or donation and (ii) transfers in case of tax neutral reorganizations.
- New contributions in cash. The shares to which the dividend relates must have been issued in remuneration of a contribution in cash that took place after 1 July 2013. Such contribution can be made upon incorporation or upon a post-incorporation capital increase, yet can not stem from taxed reserves pertaining to the special regime for liquidation reserves taxed at 10% upon reservation. A contribution of a debt claim vis-à-vis the company does not qualify as a contribution in cash. The same holds true for so-called quasi-contributions (meaning that the shareholder or manager sells an asset to his company within two years following the incorporation of the company, provided that the asset represents at least 10% of the equity of that company).
- Duty to fully pay up the shares. The shares must be fully paid up. In order to assess this requirement, the moment at which the general meeting of shareholders decides to distribute the dividend is decisive. It is therefore possible that a contribution is made presently whereas the shares are only fully paid up at a later stage, and still benefit from the preferential regime.
- Vesting period. In order to benefit from the reduced withholding tax rates, the company can not immediately distribute the dividend. Indeed, in a first phase, the withholding tax rate is reduced from 30% to 20% if the dividend has been paid or attributed at the time of profit distribution during the second accounting year following the capital contribution and, in a second phase, to 15% for dividends paid or attributed at the time of profit distribution during the third accounting year or any consecutive year. In other words, dividends distributed at the time of profit distribution during the year in which the capital contribution has been made or the year thereafter will remain subject to withholding tax at the general rate of 30%.
Vesting period: how to interpret?
In practice it is not clear how to interpret the vesting period. More particularly, it is unsure whether the 15% reduced withholding tax rate can only apply for dividends stemming from profit pertaining to the third accounting year or any consecutive year or, rather, also dividends stemming from retained earnings from earlier years can qualify, provided that the dividend itself is distributed not earlier than the third accounting year.
For example, assume a qualifying capital increase has been made in accounting year 2014. As a result, only dividends paid or attributed at the time of profit distribution during accounting year 2017 (general meeting of 2018) can qualify for a reduced withholding tax rate of 15%. Does this reduced rate only applies to dividends out of profits pertaining to accounting year 2017 or also to retained earning built up during accounting years 2014 to 2016, provided that the dividend distribution itself is not made prior to the profit allocation for accounting year 2017?
In any case, the law is unclear, since the French and Dutch versions use a different wording in this respect. The Dutch version refers to dividends stemming “out of” (Dutch: “uit”) profit allocations of the third or following accounting years whereas the French version refers to dividends paid or attributed “during” (French: “lors de”) the third or following accounting year. The French version of the law thus seems to be broader, since no direct reference is made to profits made during a given accounting year.
In reply of a parliamentary question n° 17946 of 10 May 2017, the Minister of Finance now pleas for the broader interpretation, to the benefit of the taxpayer. In that reply, the Minister brings to the attention of the requesting member of Parliament that the law does neither stipulate “in which manner the profit allocation must be performed, i.e. through a decision of the general assembly of shareholders or otherwise, nor to which profits the dividends must relate, i.e. from the current accounting year or previous years”. The said member of Parliament concludes from the answer of the Minister – we believe with reason – that dividend distributions out of profit stemming from retained earnings of previous tax years can also qualify for the reduced withholding as long as the distribution is not made before the profit allocation of the third accounting year.
If you would have any questions relating to the VVPR ‘bis’ regime or if you wish assistance with opting for the VVPR ‘bis’ regime and other preferential regimes relating to dividend withholding tax (in particular the regime of the liquidation reserve, also called the VVPR ‘ter’ regime), do not hesitate to contact Mythra Lawyers.