Withholding tax on liquidation payments increases from 10% to 25%

The retained profits distributed among the shareholders upon the liquidation of a company are now subject to 10% withholding tax.

From 1 October 2014 onwards, the tax rate will be 25%.

There are two ways to avoid this increase of the withholding tax:

1/ By liquidating your company before 1 October 2014.

2/ By converting the reserves of the company approved by the general meeting at the latest on 31 March 2013 by notarial deed into capital during the most recent full taxable period befor 1 October 2014.

Since there are not many companies with a financial year closing per calendar year which hold their annual general meeting at the latest on 31 March, only the available reserves as of 31 December 2011 qualify for incorporation into capital.

The most recent full taxable period is fro the majority of companies the financial year closing at 31 December 2013. The Minister of Finance recently extended the term for the incorporation of reserves until 31 March 2014, so that notaries public will have more time to prepare the deeds.

If the company does not have sufficient liquidity to proceed to the incorporation by means of a capital increase in cash, a company auditor has to be appointed to prepare a report with respect to the shareholders' claim on the company.

The companies with a financial year ending on 31 December 2013, however, have to pay the 10% withholding tax before 15 January 2014.

Finally, the favourable treatment is subject to several additional conditions. The converted reserves have to remain in the company for at least 4 years (8 years for large companies). The dividend policy applied during the five preceding years may not be changed, either.

If you decide to convert the company's reserves into capital in orde to avoid the increased tax rate of 25%, please contact Panis.