When Belgian private individuals envisage selling shares in a cash-rich company, a buyer should review whether this cash would not give rise to potential tax issues for him.
On 6 September 2022, the Court of Appeal of Antwerp confirmed the reclassification of capital gains on shares into taxable dividend income, based on the general anti-abuse rule of the Belgian Income Tax Code.
In the case at hand, individual shareholders had transferred their shares in the Target Group to a third-party buyer. The net cash position of the Target Group was factored in the acquisition price. The acquisition was largely financed by a bank debt. Following the acquisition, excess cash in the Target Group (i.e. cash in excess of the operating needs) was up-streamed to the buyer through a loan. The buyer used the proceeds to reimburse part of the bank debt.
The Court of Appeal of Antwerp ‘reclassified’ the capital gain realised by the individual shareholders upon the disposal of their shares into dividend income up to the amount of the reserves. The rationale of this reclassification was grounded in the fact that the excess cash could have been distributed as dividend to the shareholders prior to the acquisition of the Target Group rather than having been included in its acquisition price. The fact that the Target Group has transferred the cash to the buyer via a loan and not via a dividend distribution appears to be irrelevant for the Court.
In the case at hand, the tax authorities claimed additional personal income tax from the individual shareholders. Strictly speaking they could also have claimed withholding tax from the Target Group, which makes this issue relevant for potential buyers as well.
Summarising, if the Target has cash on the balance sheet, both sellers and buyers should analyse whether this involves a risk that the tax authorities may try to tax part of the capital gains on shares.
Thanks to Luc Legon for this contribution