A. Tax Treatment of Share Redemptions
I. Taxes on Income or Benefits
1. At the Company Level
When a company redeems or otherwise acquires its own shares, the so-called "acquisition bonus" (i.e., the excess of the purchase price or acquisition value of the shares above the portion of the paid-in share capital represented by the redeemed shares) is treated as a dividend distribution.
Provided that the redemption takes place according to the rules of the Belgian Company Laws, the dividend will only be taxable either upon the nullification of the own shares or, absent such nullification, upon the recognition in the company's accounts of a reduction in value of these shares, the sale of the shares at a loss or the liquidation of the company. On the other hand, in case the redemption does not take place according to the rules of the Belgian Company Laws, the taxation of the dividend occurs at the time of the redemption.
However, the characterization of the acquisition bonus as a dividend normally does not imply that the company will actually pay tax on this dividend. In fact, no corporate tax will be due to the extent that the redemption is made using paid-in capital and/or taxed reserves. Corporate tax will only be due to the extent that the redemption is made using tax-free reserves.
Finally, it should be noted that, even in case no capital reduction occurs from a corporate law point of view, a redemption always leads to a reduction of the fiscal capital of the company (i.e., the paid-in capital which can be reimbursed tax-free to the shareholders). The fiscal capital is reduced in proportion to the fiscal capital represented by the own shares acquired.
2. At the Level of the Shareholders selling their Shares
The income realized by individuals upon a redemption of their shares by the issuing company is, in principle, exempt from income tax. It is noteworthy to mention, however, that since 1996 it appears that the tax authorities systematically challenge the tax-free character of a redemption on the basis of the general anti-abuse provisions contained in the Income Tax Code, and try to recharacterize the redemption as an ordinary dividend distribution subject to the 25% withholding tax.
As is the case for individuals, no withholding tax is due upon the redemption.
However, a Belgian resident company will be taxable on the income realized upon the redemption according to corporate income tax. To the extent that the income corresponds to the deemed dividend, this dividend will in principle benefit from the 95% participation exemption, so that only 5% of the gross "dividend" received will be taxable, at the current ordinary rate of 40.17%. The participation exemption only applies if a series of conditions is fulfilled (inter alia, the corporate shareholder should hold a participation of at least 5% or which has an investment value of at least BEF 50 million) and subject to several so-called "anti-abuse" provisions. Any excess above the deemed dividend will, as a rule, be tax exempt as a capital gain on shares (provided that certain conditions are met).
c. Pension Funds and other Institutions
Pension funds and other institutions subject to the legal entities tax are in principle not taxable on the income realized upon a redemption (see item a. above).
In Belgium, non-residents are subject to the same tax regime as residents as far as redemptions are concerned. No withholding tax is due upon redemption.
II. Taxes other than on Income or Benefits
No stamp duties, registration taxes or similar levies are due on the redemption.
B. Accounting Treatment of Share Redemption (Article 52bis of the Belgian Company Laws)
1. Redeemed Shares to be Cancelled
Companies must cancel their redeemed shares in the following circumstances:
Shares must be destroyed when acquired upon implementation of a resolution of the annual shareholders' meeting to reduce the capital of the company.
Any shares acquired in breach of para 1 of Article 52bis of the Belgian Company Laws and those which have not been sold within the period set out in para 4, second paragraph, (3) to (5) of Article 52bis shall be null and void ipso jure. The board of directors must destroy the aforementioned shares.
2. Redeemed Shares to be Accounted For
In all other cases, redeemed shares must be accounted for as assets on the balance sheet of the company. However, a reserve must be constituted and can not be disposed of by the annual shareholders' meeting. The amount of this reserve must be equal to the value which the acquired shares have been assigned on the assets side under the heading "Cash Investments" ("placements de tresorerie / geldbeleggingen").
C. The Regulatory Issues of Share Redemptions (Article 52bis of the Belgian Company Laws)
1. General Limits for the Redemption of Shares
General limits for the redemption of shares (irrespective of the number) are set out in para 1 of Article 52bis.
The nominal value or, in the absence thereof, the net asset value of the acquired shares, including those previously acquired by the company and which it holds in portfolio, those acquired by a subsidiary of the company as defined by the Belgian Company Laws (Article 52quinquies, para 1, indent 2) and those acquired by a person acting in his own name but for the account of the subsidiary or the company, may not exceed 10% of the issued capital.
In addition, the shareholders' meeting or the articles of incorporation must specifically provide the maximum number of shares to be acquired (within the above-mentioned 10% limit).
This restriction does not apply to :
- shares acquired for immediate destruction on implementation of a resolution of the shareholders' meeting to reduce the capital of the company;
- shares transferred to the company as universal successor;
- fully paid-up shares which are sold to recover a claim of the company on the owner of such shares;
- shares acquired from subsidiaries of the company in order to reduce the number of shares owned by those subsidiaries in the company.
2. Restrictions on the Period During Which the Redemption Has to Take Place
The shareholders' meeting or the articles of incorporation must specifically provide the period for which the authorization to redeem shares is granted. This period may not exceed 18 months. The board of directors will then organize the redemption during that period.
No other restrictions apply.
3. Tender Offer Requirement
For non-listed companies, the proposal to redeem shares must be made to all shareholders on the same conditions, except when the acquisition has been unanimously decided at a general shareholders' meeting at which all shareholders were present or represented.
Companies the shares of which are listed on the first market of a Belgian securities exchange or included on the official list of a securities exchange in a Member State of the European Union may purchase their own shares on the stock exchange without the need to make a tender offer to the shareholders. No stock exchange restrictions regarding redemptions exist in the Belgian system.
4. Over-subscribed Offers
The general shareholders' meeting or the articles of incorporation must provide the maximum number of shares to be acquired. The shares acquired in violation of this requirement are null and void ipso jure. The board of directors should destroy said shares and file a list thereof for deposit with the clerk of the Commercial Court.
If the maximum number of shares to be acquired is not enough to satisfy the candidate sellers, a pro rata allocation will apply. This results from the principle of equality between shareholders in the case of share redemptions.
If necessary, however, the number of shares to be acquired, as originally announced, may be raised by the board of directors within the limit provided by the annual shareholders' meeting or the articles of incorporation.
5. Disclosure Requirement
Companies of which all or part of their voting shares have been included on the list of the first market of a Belgian securities exchange or included on the official list of a stock exchange situated in a Member State of the European Union must notify the Banking & Finance Commission of the transaction which they are considering, in accordance with Article 52bis Belgian Company Laws. The Banking & Finance Commission must establish whether a redemption transaction complies with the resolution of the annual shareholders' meeting and, in cases where the Banking & Finance Commission is of the opinion that such redemption transaction does not so comply, it must publish its advice.
The content of this article is intended to provide general information on the subject matter. It is not a substitute for specialist advice.
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