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From a tax point of view, an acquisition of own shares can be
interesting especially when economic or financial reasons to do so
also exist.
Some motivations could be the fact to allow third parties to
enter into the capital without forcing them to find huge funding,
optimizing the financial structure, or other motives as mentioned
in the previous article.
Please note that a purchase of own shares for mere tax reasons
is in certain cases to be avoided (cfr infra).
The tax treatment of the purchase of own shares by a company can
be summarized as follows:
the positive difference between the acquisition price (or if not
determined the value of the shares) and the part of the
(revalorized) paid in capital representing the acquired shares, is
considered as dividend distributed;
tax wise a dividend is considered distributed at the moment that
either:
a capital loss is booked on the acquired shares
the shares are sold;
the shares are destroyed;
and ultimately at the moment the company is liquidated.
The purchase will be deemed to relate proportionally to the paid
in capital and the reserves.
According to article 186 ITC the positive difference between the
acquisition price and the revalorized paid in capital represented
by the purchased shares will be considered a dividend subject to
the same tax rate as for liquidation or partial distribution of the
equity. For the time being this tax rate is still 10%. The 10%
withholding tax can be avoided if the shareholder is a company that
owns a shareholding of at least 10% of the distributing company for
an uninterrupted period of minimum twelve months.
When the repurchase is solely inspired by tax motivations (the
taxation of the purchase bonus at 10% whereas a normal dividend
distribution would suffer a tax of 25% or 15%), the tax authorities
would probably try to challenge the purchase on the basis of
article 344 par. 1 ITC (anti-avoidance legislation).
We believe that if other legal consequences are attributed to a
repurchase of own shares as compared to a dividend distribution,
the tax authorities are not entitled to a successful
requalification. This is certainly the case upon a non proportional
purchase of shares (dividends are generally proportionally granted
to all shareholders), however one needs to pay attention to the
basic principle of equal treatment of shareholders. Another
possibility is a proportional purchase whereby one or more shares
are destroyed (decreasing the net equity and causing disappearance
of purchased shares, whilst upon dividend distribution the shares
remain intact).
In other cases we recommend a certain prudence (valid economic
or financial reasons for the purchase) and one will certainly avoid
successive purchases of own shares in order to distribute the
equity of the company to the shareholders in a tax advantageous
way.
To be noted also that more and more rumors are circulating that
the tax treatment of dividends and (partial) liquidation bonus will
be aligned in the future (tax rate of 20%?) so that the tax benefit
of repurchase of own shares will mainly disappear in the long
run.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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