A new law introducing a withholding tax exemption for Belgian resident individuals receiving shares in the context of a "spin-off" was published yesterday in the Belgian Official Gazette. According to the new law, the distribution by a company to its shareholders of shares of a subsidiary in the framework of a "spin-off" is now exempt from Belgian withholding tax, if certain conditions are met. The new law finally addresses the long-standing criticism related to the levying of Belgian withholding tax on the distribution of shares in the context of such "spin-offs."

Due to a very broad definition of the notion of "dividend" in the Belgian Income Tax Code, any benefit distributed by a company to its shareholders is generally characterized as a dividend and is in principle subject to withholding tax (at least for non-resident companies if a Belgian financial institution intervenes in the distribution of such dividend).

In a Belgian and a European context, the Belgian Income Tax Code provides, however, for certain exceptions to the aforementioned general rule, e.g., in case of a demerger or split of a company and in case of a so-called partial demerger (i.e., a corporate transaction pursuant to which a company contributes certain assets into a new or existing company in exchange for shares, whereby the new shares are directly attributed to the shareholders of the former company).

As certain foreign corporate restructurings do not qualify for such exemptions, Belgian resident shareholders were often faced with a deemed dividend characterization and a related withholding tax when receiving shares from a US or other non-EU company in the context of certain corporate reorganizations. An example of such problematic scenario is a US "spin-off." The notion of "spin-off" is generally used to describe an operation in which a foreign company contributes part of its activities or certain assets to a newly established or existing company, without the contributing company being liquidated, in exchange for shares of the receiving company, whereby such received shares are, in a second phase, distributed to the shareholders of the contributing company.

As such spin-off is technically not the same as a (Belgian-style) partial demerger, the Belgian tax administration was historically of the opinion that such distribution of shares was to be considered as a "dividend in kind" and therefore subject to Belgian withholding tax (except if and to the extent the distribution could be considered as a partial repayment of the fiscal capital of the distributing company). In the past, a Belgian court also ruled on such matter in favor of the Belgian tax administration. The only way to avoid such dividend characterization and the related withholding tax was to sell the shares prior to the spin-off and to purchase the (different) shares again once the spin-off was completed. The characterization of the shares received upon a spin-off as a dividend is, however, economically counterintuitive.

In order to address this matter, the Belgian Income Tax Code now introduces a withholding tax exemption with respect to "dividends" distributed by a company in the context of a spin-off, if the following conditions are met:

  • the company distributing the shares (company A) must be a listed company
  • the shares being distributed by company A must be shares of another listed company (company B)
  • both company A and company B must be established in a state with which Belgium concluded a double tax treaty (or other international agreement) providing for the exchange of information between that state and Belgium
  • the shares being distributed by company A must have been acquired by company A upon the contribution of a branch of activities in company B
  • the contribution from company A into company B and the distribution by company A of the shares of company B must be part of the same transaction
  • the spin-off must be considered as tax neutral pursuant to the tax laws of the state where company A is established

The new withholding tax exemption enters into force as of January 1, 2019. The "dividends" attributed or paid as of this date will thus be exempt from Belgian withholding tax. Taxpayers who incurred withholding tax as of January 1, 2019, in the context of foreign spin-offs should therefore consider filing a tax complaint in order to claim a refund of such withholding tax.

Although certain of the aforementioned conditions may be subject to some uncertainty, the new exemption is certainly very welcome.