Although various listed groups have already announced to refrain from distributing dividends to their shareholders, centralising cash within the group is likely marked as a high priority item on every corporate agenda.
Multinational groups may currently be revisiting their cash repatriation policy / advancing dividend distributions to get ahead trapped cash issues – e.g. arising from expected current year losses or (emerging) markets stepping into capital controls – or to move cash to where it is needed most to face the ongoing crisis. Against this background, we would like to remind of some basic tax aspects of cash repatriation.
Item #5: Cash repatriation demands a case-by-case analysis
One possible course of action to repatriate cash is to distribute historical retained earnings. Obviously, the (Belgian) tax implications of such dividend distributions are very different for inbound dividends vs. outbound dividends.
For inbound dividend distributions from EU subsidiaries, a full participation exemption is generally available if the participation threshold (10% or €2.5m acquisition value) is met, the shares are held for more than 1 year and to the extent for the distributing company – in short – the taxation condition is fulfilled. As the taxation condition concept is governed by a complex set of rules, a detailed analysis is needed. Recent ECJ case law in the so-called Danish court cases further confirmed a stringent approach to anti-avoidance rules, which may have far-reaching consequences in case of distributions to non-EU resident beneficial owners via entities interposed in EU member states with more favourable withholding tax rules.
For inbound dividends from non-EU subsidiaries, conditions to participation exemption are the same, however the EU safe harbour rules of the dividend received deduction regime are inexistent. Therefore, additional consideration should be given to the tax implications of such inbound dividend distributions.
Apart from the taxation in the hands of the recipient, it is also important to determine the source state taxation (known in Belgium as withholding tax), as such taxation can become a real tax cash out. In this respect, it is worthwhile reminding of the possible impact of the Multilateral Instrument (MLI).
As regards outbound dividends, Belgian companies may rely on a domestic withholding tax exemption if the beneficial owner – holding at least 10% of the shares – has sufficient relevant substance, both companies have a common legal entity form and are subject to corporate income tax. Alternatively, other domestic exemptions or reduction or exemption may be available under the relevant double tax treaty. Absent any exemptions (or reductions) a 30% withholding will apply.
Another way to repatriate cash is to repay outstanding loan balances and accrued interest. Whilst the (early) repayment of the principal amount typically not results in adverse tax implications, the payment of accrued interest may do so. Contrary to Belgium – where withholding tax becomes due at the earliest of attribution or payment – other jurisdictions may only levy withholding tax when the interest is effectively paid. Therefore, Belgian creditors may be confronted with a foreign withholding upon repayment of accrued interest by the foreign debtor (which may ultimately be – partially – creditable in the Belgian tax return, but often leads to a tax cash-out).
Navigating both Belgian and foreign legislation, as well as increasingly stringent anti-abuse rules, a simple act like cross-border cash repatriation may turn into a complex transaction with various (also non-tax) aspects to consider.
While most companies have applied for the COVID measures available by now, we see that quite some groups struggle to monitor closely their short-term (and certainly mid-term) cash position and how to manage and optimise it further to steer their company through this crisis in the best way possible. We meanwhile have created the following email platform: firstname.lastname@example.org in order to give you a sounding board in these challenging times.