The tax treatment regarding the sale of shares in a company holding cash reserves is currently in turmoil. And with good reason: two recent court decisions have shattered the widely accepted view that such transactions fell outside the scope of taxation.

Shift in case law

In a ruling dated September 6, 2022, the Antwerp Court of Appeal held that the portion of the purchase price corresponding to the cash available in target companies—which had been structured using a bridge loan followed by a post-acquisition dividend distribution—was taxable in the hands of the seller. In this instance, the cash amount involved was approximately €6.3 million out of a total sale price of around €14 million. The seller, who had relied on professional advisors, was deemed to have committed "tax abuse" on the grounds that it would have been more customary to distribute the cash prior to the sale, incurring withholding tax.

This stance has now been confirmed by the Court of Cassation in its judgment of January 11, 2024, following an appeal in the same case. The Court held that tax abuse was established even if the seller was not personally involved in every legal act executed. It was sufficient to establish their "unity of intent"—namely, the link existing between the various legal acts.

These rulings, which apply the anti-abuse provision to a business sale transaction for the first time, mark a major shift for M&A practitioners (1).

Legal and practical context

To better grasp the extent of this change, it is helpful to recall the legal and practical framework governing this area.

Why include cash in the sale price? When the seller is an individual, extracting cash via dividends is subject to withholding tax (2). Conversely, by including cash in the sale price, a corporate buyer can subsequently extract it under the parent-subsidiary regime or RDT (Revenus Définitivement Taxés / Definitive Tax Exempt Income), benefiting from a full tax exemption. The incentive behind this approach is clear...

It should be remembered that capital gains on shares are exempt from tax only if they are realized within the scope of the "normal management of private assets." This exemption, long considered a cornerstone of Belgium's tax system, is technically an exception, though it was recently reconfirmed by the Constitutional Court (3).

The concept of tax abuse (Art. 344 §1 CIR) was added to the legislative toolkit in 1993. The principle of choosing the least taxed route is now limited by this counter-principle of tax abuse. While often brandished as a threat but less frequently applied in practice, the concept of tax abuse is gaining significant strength.

While the sale of a "cash company" (a company holding exclusively or predominantly cash assets) has long been considered abusive, this was not the case when a target company held a reasonable proportion of cash. The concept of "Net Cash" or "Excess Cash" is a standard ratio used in valuation exercises (4). Financial structures designed to finance this cash position and potentially extract it post-sale were widespread, with financial assistance rules acting as the main safeguard (5).

The two aforementioned rulings therefore bring a rather abrupt halt to what was previously a largely uncontroversial practice.

What takeaways for practical application?

What lessons should be drawn in practice? Should a case where a "normally diligent" shareholder sells a company holding liquid assets required for working capital be considered abusive? In any event, structures designed to evade the withholding tax that would normally have been due absent a sale appear vulnerable to challenge. Everything comes down to individual circumstances, and caution is more than ever advised.

  1. See in particular articles by Denis-Emmanuel PHILIPPE (Bloom Law) and Huu-Toan NGUYEN (Afschrift).

  2. In principle at a rate of 30%. This rate may be reduced in the case of a liquidation reserve, subject to strict conditions.

  3. Article 90, 1° CIR. This principle was confirmed by the Constitutional Court in a ruling handed down on February 24, 2022.

  4. One of the primary valuation methods consists of applying a multiple to EBITDA and subtracting net debt. When net debt is negative (reflecting a net cash position), it is added to the enterprise value to arrive at the equity purchase price.

  5. This civil law concept limits the extent to which target company assets can be leveraged or used, in order to protect creditors.

Article originally published in La Libre Économique by Tanguy della Faille, Partner at Fondaris, on 27/03/2024. Published/updated version on the Fondaris website with the author's permission.