Compatibility between the liquidation reserve and the Tax Shelter

Articles 184c or 541 of the CIR92 income tax code

A liquidation reserve, as stated in articles 184c or 541 of the CIR92 income tax code, can be constituted from the 2013 tax year, i.e. at the earliest for the accounts closing on 31st December 2012. 

Article 184c of CIR92 states in paragraph two that the “liquidation reserve is constituted by the allocation to one or more separate accounts of the liabilities of all or part of the accounting profit after tax”. This notion of ‘accounting profit after tax’ needs to be interpreted as the profit to be allocated, as stated in the explanatory memorandum for the Act and the opinion of the CNC (Accounting Standards Commission) 2015/2 dated 13th May 2015. 

We feel it is of value to state again that the liquidation reserve applies to small businesses only, in the sense of article 15 of the Companies’ Code, since only small companies are liable to constitute a liquidation reserve in the sense of article 184c or 541 of CIR92.

Last update on : 19.05.2020

To be examined at two separate times

The compatibility of a liquidation reserve with a Tax Shelter investment needs to be examined at two separate times, i.e.:

  • at the time the liquidation reserve and the Tax Shelter tax-exempt reserve are constituted
  • and at the time the definitive exemption of the Tax Shelter reserve is granted. 

Last update on : 19.05.2020

A separate contribution of 10%

1.    At the time the liquidation reserve and the tax-exempt reserve are constituted 

The constitution of a liquidation reserve has, as a corollary, the payment of a separate contribution of 10% on the amount of the liquidation reserve. This contribution is owed for the taxable period during which the liquidation reserve was constituted and should be considered as a non-deductible tax charge on the part of the company. As a result, this additional contribution of 10% has the effect of increasing the company’s tax burden and hence of reducing the amount of “taxable reserved profit”, which is used as the base for the optimum calculation of the Tax Shelter investment. This separate contribution therefore has a negative effect on the Tax Shelter investment capacity.

The liquidation reserve must be constituted based on the allocation of the profit to be allocated – i.e. the profit remaining after allocation to the tax-exempt reserve in the context of a Tax Shelter arrangement. As a result, the constitution of a Tax Shelter tax-exempt reserve reduces the amount liable to be allocated to the liquidation reserve.

Compatibility between a liquidation reserve and a Tax Shelter operation is always possible given that the maximum amount a company and may exempt via the Tax Shelter is limited by law to 50% of taxable reserved profits. This means that an investor must retain taxable reserved profit, which can then be used to constitute a liquidation reserve. 

2.    At the time the definitive exemption of the Tax Shelter reserve is granted

When the conditions required are met for considering the temporary exemption of the tax-exempt Tax Shelter reserve as definitive, it is necessary to reverse the tax-exempt reserve and transfer the amount it contains into an at-call reserve account. These entries are recorded through the profit-and-loss account, as provided for in CNC opinion 2015/1 dated 13/05/2015. As a result, the company’s profit to be allocated will be increased for the period during which the definitive exempt comes into being, with the effect of the potential constitution of an additional liquidation reserve (subject to the fact that there is a profit to be allocated based on the accounting result for the financial year and that the company continues to be considered as a small business in the sense of article 15 of the Companies’ Code for that period). 

Last update on : 19.05.2020

Combined benefits

A Tax Shelter investment will have a positive effect: in fact, a Tax Shelter investment generates a reduction in the tax burden for the year in which the tax-exempt Tax Shelter reserve is constituted (higher equity in the case of a Tax Shelter investment) and this higher equity makes it possible to constitute a liquidation reserve in the year of Tax Shelter reserve’s definitive tax exemption.

To conclude, the accumulation of a liquidation reserve and a tax-exempt Tax Shelter reserve is possible and may even turn out to be favourable if the operation is viewed as a whole – i.e. by combining the benefits for the year in which the Tax Shelter reserve is constituted (reduction of the tax burden and increase in equity) and for the year in which the definitive tax exemption of the Tax Shelter reserve is granted (increase in the profit to be allocated). 

Last update on : 19.05.2020

Newsletter

Calculation tool