Taxation and the liquidation reserve: where do you draw the line between strategy and abuse?

Important side note: This proposal has not yet been laid down in a legal text, consequently no certainty can be given at this stage as to the correctness and/or completeness of the conditions.
The liquidation reserve is a very interesting tax tool for Belgian entrepreneurs wishing to optimise the distribution of their profits while minimising tax. However, it is also under scrutiny from the tax authorities, and is the subject of an advance ruling (no. 2024.0658 of 3 December 2024), published in the Fiscoloog/Fiscologue of 28 February 2025, particularly where its use precedes the dissolution of a company. This article explains the advantages, risks and best practice to be adopted.


1. The liquidation reserve: a tax lever for entrepreneurs

If you run an SME, you can allocate part of your profits to a liquidation reserve by paying a 10% contribution. The advantage? Reduce withholding tax on the distribution of dividends:
  • 5% if the reserve is held for at least five years,
  • 20% if the distribution takes place before five years,
  • 30% if there is no liquidation reserve.
If your company is wound up, the liquidation reserve is paid tax-free to individual shareholders. A tax opportunity not to be overlooked!


2. Dissolution of the company: what are the tax consequences?

When a company is dissolved, it continues to exist for tax purposes until its liquidation is completed. The tax authorities keep a particularly close eye on companies that build up a liquidation reserve just before dissolution. Why do they do this? Because it sometimes suspects a strategy aimed at getting round the usual taxation of dividends.
If you are thinking of dissolving your company, it is therefore essential to plan the management of your liquidation reserve carefully to avoid being requalified as a tax abuse.


3. The dividing line between tax optimisation and abuse

The Office for Advance Tax Rulings analyses situations where a liquidation reserve is created shortly before a company is dissolved. Here's what can cause problems:
  • Create a reserve solely to benefit from tax exemption,
  • Dissolve the company and continue the business under a new entity,
  • No solid economic justification for this approach.
If your company is at the end of its life, make sure that your liquidation reserve is not perceived as a mere tax ploy.


4. The positions of the Office for Advance Tax Rulings and the legislator

The Office for Advance Tax Rulings does not question the existence of liquidation reserves, but it does seek to prevent abuse. It considers that there is a risk when:
  • A company is dissolved but continues to operate under a different legal form,
  • A reserve is set aside just before liquidation without any clear economic justification.
However, the legislator recognises the liquidation reserve as a long-term savings mechanism for entrepreneurs and not as a systematic abuse.


5. Upcoming tax changes: what you need to know

The government plans to increase the rate of withholding tax to 6.5% for premature distributions of liquidation reserves, but at the same time has announced that it wants to reduce the 5-year period mentioned above to 3 years. If you intend to use this tool, it is essential to monitor these developments in order to adjust your strategy.


6. Best practices for avoiding tax reassessments

To take advantage of the liquidation reserve while complying with regulations, here are a few recommendations:
  • Have a clear economic justification for building up your reserve,
  • Avoid setting it up just before your company is dissolved,
  • Do not transfer your activities to a new company immediately after dissolution,
  • Consult a tax expert to ensure that you comply with the rules in force.  


Conclusion

The liquidation reserve is an effective tool for optimising your company's tax position, but its use must be well planned. With the current reforms and the vigilance of the tax authorities, it is essential to adopt a clear strategy that is in line with the legislator's objectives.
Make the right decisions today to avoid unpleasant surprises tomorrow!

Do you need support? Contact Maurizio D'Auria or Hubert Hellraeth for a personalised audit!