With the entry into force of the Programme Act of […], a new exit tax is introduced at the level of shareholders. This exit tax will apply to a deemed dividend that shareholders are considered to have received as a result of a cross-border transfer of the company’s seat (Article 210, §1, 4°, ITC) or certain restructuring operations such as mergers and demergers.
Until now, the notional treatment of such transactions as a liquidation had consequences only within the scope of corporate income tax. As a result, the company could be taxed on latent capital gains and tax-exempt reserves. This equivalence in principle had no tax implications for the shareholders, as no actual dividend was distributed.
This position, grounded on a strict application of the principle of legality, is shared by the Ruling Commission. However, the Central Services of the tax administration take a different view, arguing that the liquidation equivalence should also extend to the shareholder level. Accordingly, a cross-border transfer of seat would, from the perspective of the shareholders, result in a deemed but taxable dividend distribution.
These conflicting interpretations have led to various legal proceedings, which so far appear to be turning out in favour of the shareholders. In practice, however, the tax administration continues to adhere to the position of the Central Services and thus proceeds with the taxation of a deemed dividend in the case of cross-border seat transfers.
Through the Programme Act, the tax legislator aims to put an end to this controversy (at least for the future). The legal fiction is now explicitly extended to the shareholder level. Shareholders are deemed to receive a (fictitious) dividend equal to the capital gains booked on the assets transferred abroad by the emigrating company, after corporate income tax has been applied, and in proportion to the shares they hold in the emigrating company.
This fiction applies to:
- resident individual taxpayers;
- Belgian companies and legal entities;
- non-resident taxpayers.
The deemed liquidation dividend is subject to the standard tax regime for movable income, namely a withholding tax of (in principle) 30%. However, an exemption is provided for the portion of the deemed liquidation dividend that can be attributed to regularly constituted liquidation reserves. Shareholders subject to corporate income tax may, subject to legal conditions, benefit from the dividends-received deduction (DRD) regime.
To avoid economic double taxation, a correction mechanism is introduced. This mechanism allows the shareholder to offset the tax paid on the deemed dividend against the tax due when an actual dividend is paid out later following the realisation of the effective capital gain.
In the absence of an actual distribution, no withholding tax can be levied at source. Consequently, the shareholders concerned must declare the deemed dividend in their tax return. The company transferring assets abroad is required to issue an individual tax form to each affected shareholder. If it fails to do so, a separate assessment will be established at the level of the company.
The extension of this legal fiction to the level of shareholders is legally questionable for several reasons:
- Under national law, it contradicts the fundamental principle that taxation on investment income requires an actual flow of income.
- Under European law, the measure may constitute a restriction on the freedom of establishment, as it results in the taxation of fictitious income that Belgium could equally tax at a later stage, upon the actual distribution to a Belgian shareholder.
- Under international law, the unilateral reclassification as a dividend without an explicit treaty basis may lead to economic double taxation if the destination country does not recognize the fiction and fails to grant an exemption or credit at the time of the actual distribution.
It is therefore to be expected that this reform will continue to give rise to numerous legal disputes in the future.
For ongoing proceedings, this new regime can in any case be invoked in favour of the shareholders. The legislative amendment confirms that, prior to its entry into force, the fiction only had consequences at the level of corporate income tax and did not extend to shareholders.
Authors: Océane Magotteaux & Pieterjan Smeyers, attorneys at Andersen Legal
