Liquidation reserve and shareholder-company
February 2022 – The liquidation reserve allows the entrepreneur who carries out his activity as a company to build up savings which he can distribute tax-free when the company is wound up. However, this tax exemption is not available to shareholders who are themselves in the form of a company. However, a solution does exist.
How does the liquidation reserve work?
The liquidation reserve was created when the government decided to subject the liquidation bonus (the profit you personally distribute to yourself when your company is dissolved) to withholding tax. Until about 2012, you could accumulate profits in your company and then distribute them to yourself when you reached pensionable age by winding up the company. This was more advantageous than distributing the profit directly as a dividend, because you had to pay withholding tax. When the government decided in 2012 to apply withholding tax to liquidation bonuses as well, many entrepreneurs were suddenly taxed on their savings. In so doing, the government removed one of the main advantages of having a company.
To remedy this, the government has introduced a system whereby these savings are still preserved. The savings can still be distributed tax-free provided that :
the profit for the year is booked (in part) in a separate account from the liabilities; and
you do not distribute this amount until the company is liquidated.
When transferring the profit to the liquidation reserve, you must pay a special contribution of 10%.
If you distribute this sum before the liquidation, you must pay withholding tax. If you distribute it within five years of the transfer of the profit to the liquidation reserve, you will pay 20% withholding tax (this will amount to 30%). If you distribute it after five years, you will only pay 5% withholding tax.
Only for natural persons
The special contribution of 10% is due as soon as you transfer profits to the liquidation reserve (you indicate this in the special appendices to your return). But the exemption on distribution at the time of liquidation is only granted if the beneficiary is a natural person.
If other shareholders join the company during its existence, this has no impact on the liquidation reserve already built up.
But if there are corporate shareholders, this may be a problem. Corporate shareholders are not entitled to the tax exemption on the liquidation reserve. The special contribution is lost in this case, as it will never lead to an exemption or to the reduced rate of 5% when the reserve is distributed to the company.
A new partner
Imagine that you set up a company with your best friend and build up a liquidation reserve of, say, 100 (-10% special contribution: i.e. 90 net). Your friend makes a number of other investments and sets up a holding company which, among other things, becomes the owner of the shares he held in your company. Your friend's company is now a shareholder in your company.
You continue to contribute to the liquidation reserve... and pay another 200 (minus the special contribution: 180 net).
And you want to liquidate the company.
If your best friend had always been a direct shareholder, the liquidation reserve of 270 (90 + 180) could be distributed completely tax-free.
But as your friend is a shareholder via a company, he will have to pay tax (25% corporation tax). You will indeed receive your share tax-free, but together you will pay more tax. In fact, you should never have paid the 10% special contribution when you set up the reserve, knowing that the reserve would end up in the hands of a company. The company would indeed pay tax on it.
Solution proposed by the Ruling Commission
The Ruling Commission has already made it clear in the past that it does not allow the company to choose which reserves are used for which shareholders, either on liquidation or even on distribution of reserves after five years. We could imagine, for example, that you distribute a dividend and that you take the dividend for the individual shareholder only from the liquidation reserve, and the dividend for the corporate shareholder from the other reserves. But the Ruling Commission has already ruled in the past that this is a tax abuse. This door is therefore closed.
What you could do instead, according to a new ruling, is to stipulate in the articles of association that there are A shares - reserved for individuals - and B shares - reserved for companies. You can then decide that the A shares are only entitled to a dividend from the liquidation reserve and that the B shares can never be entitled to a dividend from the liquidation reserve.
Is this not a tax abuse?
According to the Ruling Commission, there may be economic reasons for including this distinction in the articles of association when a company becomes a shareholder. Such a distinction allows the parties to avoid a discussion about the valuation of the shares, especially in relation to the existing liquidation reserves. Such a distinction between natural persons and companies benefits the coherence of the interests of the various shareholders and the continuity of the company, including in the long term, in anticipation of the possible arrival of new shareholders.
The Ruling Commission therefore effectively opens a door to prevent liquidation reserves (on which the special 10% contribution has been levied) from ending up in the hands of companies that will still have to pay tax on them. But the procedure is strictly described. And you had better strictly observe all the formalities.
