Executive compensation for a self-employed business owner is a tax-deductible expense for the company, but it is subject to personal income tax (via payroll withholding) and self-employed social security contributions. It should be noted that these self-employed contributions are capped (at €4,131 in 2013), making this option attractive for compensation exceeding €81,650. Dividends, on the other hand, are subject to a withholding tax (précompte mobilier) of 25%, which comes on top of the corporate income tax already incurred (33.99%), resulting in an overall effective tax rate of approximately 50.5%.
There are other, more favorable—and less heavily taxed—ways to extract liquidity from a company.
Capital reduction. When a company has substantial share capital, it is possible to reduce it tax-free. However, the legal minimum capital must be maintained, and the law mandates a strict procedure to protect the rights of creditors.
Share buyback (repurchase of own shares). This technique allows cash to be distributed to shareholders. The transaction is capped at 20% of the share capital, and equal treatment among shareholders must be respected. For listed companies, strict formal requirements apply. The dividend withholding tax (précompte mobilier) has increased from 10% to 25%, making this technique significantly less attractive than in the past.
Group insurance premium (backservice). Premiums paid into a group insurance policy are 100% deductible from the company’s taxable base. For an executive upon retirement, the effective tax rate is around 20%. However, the "80% rule" must be strictly observed, meaning that total pension benefits (statutory + supplementary) cannot exceed 80% of the last annual gross remuneration. If past premium payments fall short of reaching this 80% ceiling, a single large lump-sum premium (backservice) can be paid all at once, which remains fully tax-deductible.
Participation Exemption / Definitely Taxed Income (Revenus Définitivement Taxés / RDT). This mechanism prevents double taxation on dividend distributions between corporate entities. When the target company is held by a holding company, dividends received by the holding are 95% tax-exempt. The holding must own a stake of at least 10% and hold it for a minimum period of one year. The effective corporate tax on this dividend is only 1.7% (33.99% x 5%). Of course, if the holding company subsequently distributes a dividend to its individual shareholders, the 25% withholding tax (précompte mobilier) will apply.
Post-acquisition super-dividend. When the target company is owned by natural persons, it may prove more advantageous to sell it with its excess cash included, valued on a euro-for-euro basis (or possibly with a minor discount). The buyer—who will likely set up an acquisition holding company—can then extract the cash under the aforementioned RDT regime. This requires a one-year holding period, at least for an amount equivalent to the dividend withholding tax (25%). The buyer will therefore need to secure a bridge loan to pay the agreed purchase price at closing, which can then be repaid once the super-dividend is distributed.
Intercompany loan (financial assistance). The strict prohibition on financial assistance (Art. 629 of the Companies Code) ended on January 1, 2009. However, highly restrictive conditions and personal liability for directors mean this mechanism is rarely used, with the super-dividend technique remaining widely preferred for its flexibility.
Numerous options exist to extract liquidity from a company, either before or after a transaction. The optimal choice depends on the specific circumstances of the business. Professional guidance (from a chartered accountant, auditor, lawyer, or tax advisor) is essential to navigate these structure options clearly.
This article is freely inspired by "Overtollige Liquiditeiten : uit de vennootschap halen voor de verkoop, of niet ?", written by my colleague Bruno Vervisch and published on October 28, 2010, in Accountants & Co.
Illustration: Clou
Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 27/04/2013. Updated/published version on the Fondaris website with the author's permission.
