Camille Van Vyve
16 Oct 2023
The liquidation reserve, a good idea for taking cash out of your company
The liquidation reserve is, under certain conditions, a tax-efficient solution for taking money out of your company. Moreover, nothing prevents you from investing it! To make the most of this scheme, it is nevertheless necessary to be well informed about the rules in force. In this blog, you will also find a free tool allowing you to simulate your personal situation.
What is the liquidation reserve?
The liquidation reserve is a cash reserve which may be set up by certain companies subject to corporate tax in Belgium. This reserve is fed by retained earnings, that is, profits that have not been distributed to shareholders in the form of dividends. Upon immediate payment of a 10% contribution, the liquidation reserve will be exempt from tax in the event of subsequent liquidation of the company.
Why set up a liquidation reserve?
The liquidation reserve was introduced in 2015, when the withholding tax on the liquidation bonus was increased from 10% to 25%. At the time, it was common for entrepreneurs to see their company as a “piggy bank” that they could take advantage of when they retired. To counterbalance this tax increase, the government has devised the liquidation reserve, which in practice leads to the same result. The aim is to encourage business leaders in good health to set aside excess cash in order to benefit later from a tax advantage, which will materialize either when the business is liquidated or when dividends are distributed.
Who can set up a liquidation reserve?
The liquidation reserve is a tax incentive reserved for Belgian "small companies" which, on the balance sheet date of the last and penultimate financial year closed, do not exceed more than one of the following limits:
- 50 workers employed on average per year
- €9M of annual turnover excluding VAT
- €4,5M total balance sheet
It is therefore possible to exceed one criterion without losing the qualification of "small company", or even exceed two criteria for two accounting years (but not for three financial years).
How to constitute a liquidation reserve?
To constitute a liquidation reserve, the eligible company must:
- Be subject to corporation tax and have earned retained earnings. Reserves built up in the past cannot be transferred to the liquidation reserve.
- Decide to set up a liquidation reserve no later than the ordinary general assembly.
- Attach to the corporation tax return an appendix showing the amount of the liquidation reserve set up and, where applicable, the amounts that had previously been allocated to it.
- Pay the separate 10% contribution. This payment is made at the same time as the payment of corporate tax and must therefore be made by the company itself (not its shareholders). The contribution is obviously not deductible for corporate tax.
How to calculate the liquidation reserve?
In order to determine the maximum amount that can be added to the liquidation reserve, the net profit to be appropriated must be divided by a factor of 1,10 in order to extract the separate contribution of 10%. Thus, if your company's net profit for year t is €110.000, the maximum amount to be allocated to the liquidation reserve will be €110.000/1,10=€100.000. In this case, the separate contribution will amount to €100.000*10%=€10.000.
Conditions for distributing the liquidation reserve
Different scenarios may arise, depending on the conditions under which the reserve is actually distributed. We have identified three distinct scenarios here.
1. The liquidation reserve is distributed following the liquidation of the company
A "liquidation bonus" is a payment made to shareholders when a company liquidates its assets. Once the debts are repaid, the proceeds are thus shared by the shareholders. This liquidation bonus is in principle subject to a withholding tax of 30%, if the beneficiary is a natural person. However, the portion of the liquidation surplus from the liquidation reserve which has been separately taxed at 10% may be distributed to shareholders as non-taxable income. Furthermore, there is no minimum period between the creation of the liquidation reserve and the liquidation of the company in order to benefit from the exemption. In some cases, it will be wise to postpone the liquidation in order to be able to constitute “in extremis” a liquidation reserve during the general assembly!
2. The liquidation reserve is distributed in the form of dividends
If the liquidation reserve is distributed in the form of dividends, outside the context of the liquidation of the company, the shareholder cannot benefit from this tax exemption. He will nevertheless be liable for an advantageous withholding tax, the rate of which varies according to the period elapsed since the creation of the liquidation reserve: 20% if the period is less than 5 years and 5% if the period is greater than 5 years. Given the initial contribution of 10%, the distribution of the liquidation reserve becomes really interesting after the 5-year period: in this case, the total tax burden amounts to 13,64% (€10.000+€5.000/€110.000 = 13,64%), significantly less than the usual 30% withholding tax.
3. The liquidation reserve is used for operational purposes
If the liquidation reserve is ultimately used for operational purposes, for example to offset losses or finance investments, the separate 10% contribution will have been an unnecessary expense. It is therefore important to correctly analyze the future needs of the company before constituting the liquidation reserve. This scheme is particularly suitable for growing companies and management companies unlikely to make losses.
Invest the liquidation reserve
Thanks to this mechanism, many companies now have a cushion of liquidity equivalent to five years of cash, the lifespan of which is often equal to that of the company: a capital that it would be a shame to let languish on a savings account! Shareholders are indeed authorized to invest the liquidation reserve in order to generate additional income. The general assembly can then decide whether or not to allocate this income to the liquidation reserve.
Easyvest investment formulas ideal for the long term
Unlike natural person investors, capital gains on investments are however considered in the case of a legal entity as a taxable financial product, which will therefore be subject to corporate tax. Furthermore, capital losses on investments made by companies are not deductible. Investing its long-term liquidation reserve in one or more diversified ETFs increases the chances of a positive long-term return and therefore minimizes the tax risk for the company. Easyvest advisors are at your disposal to discuss the best solution for your company.
Invest with your company or as a natural person?
For the entrepreneur, what is more advantageous: taking out the profit of his company in the form of dividends, paying the withholding tax and investing the sum without being taxed on the capital gain realized on the shares? Or leave the profit in a liquidation reserve by paying the single contribution of 10%, invest the reserve and withdraw it five years later by paying the taxes due? Easyvest has built a small model allowing you to simulate your personal case, depending on the amount you wish to invest, the time horizon and the type of investment portfolio chosen. Don't hesitate to download it!
What level of withholding tax is your company subject to?
An important element to take into account in the model is the level of withholding tax applied when paying dividends to the shareholder(s). Indeed, the application of the so-called “VVPR” regime allows small Belgian companies, under certain conditions, to benefit from a withholding tax reduced to 15% or 20% instead of the usual 30%. The main condition is that the dividends must come from shares issued from July 1, 2013. For the shareholder, the difference is significant: as long as this measure will remain in application, the reduced withholding tax will therefore rather be in favor of an investment as a natural person.
Invest with your company for short periods of time
In general, it seems more interesting to invest in a company for short periods (5 years minimum, so as to be able to benefit from the reduced withholding tax), and provided that your company was created before 2013. Beyond this 5 years period, the capital gains tax (due by the company) will reduce the tax advantage linked to the liquidation reserve. It is therefore better, in a second step, to take out the money in the form of dividends and invest it as a natural person. Easyvest can advise you on this and help you build an index portfolio suited to your needs, those of your company and yours!