From a tax point of view, an acquisition of own shares can be interesting especially when economic or financial reasons to do so also exist.
Some motivations could be the fact to allow third parties to enter into the capital without forcing them to find huge funding, optimizing the financial structure, or other motives as mentioned in the previous article.
Please note that a purchase of own shares for mere tax reasons is in certain cases to be avoided (cfr infra).
The tax treatment of the purchase of own shares by a company can be summarized as follows:
the positive difference between the acquisition price (or if not determined the value of the shares) and the part of the (revalorized) paid in capital representing the acquired shares, is considered as dividend distributed;
tax wise a dividend is considered distributed at the moment that either:
- a capital loss is booked on the acquired shares
- the shares are sold;
- the shares are destroyed;
- and ultimately at the moment the company is liquidated.
The purchase will be deemed to relate proportionally to the paid in capital and the reserves.
According to article 186 ITC the positive difference between the acquisition price and the revalorized paid in capital represented by the purchased shares will be considered a dividend subject to the same tax rate as for liquidation or partial distribution of the equity. For the time being this tax rate is still 10%. The 10% withholding tax can be avoided if the shareholder is a company that owns a shareholding of at least 10% of the distributing company for an uninterrupted period of minimum twelve months.
When the repurchase is solely inspired by tax motivations (the taxation of the purchase bonus at 10% whereas a normal dividend distribution would suffer a tax of 25% or 15%), the tax authorities would probably try to challenge the purchase on the basis of article 344 par. 1 ITC (anti-avoidance legislation).
We believe that if other legal consequences are attributed to a repurchase of own shares as compared to a dividend distribution, the tax authorities are not entitled to a successful requalification. This is certainly the case upon a non proportional purchase of shares (dividends are generally proportionally granted to all shareholders), however one needs to pay attention to the basic principle of equal treatment of shareholders. Another possibility is a proportional purchase whereby one or more shares are destroyed (decreasing the net equity and causing disappearance of purchased shares, whilst upon dividend distribution the shares remain intact).
In other cases we recommend a certain prudence (valid economic or financial reasons for the purchase) and one will certainly avoid successive purchases of own shares in order to distribute the equity of the company to the shareholders in a tax advantageous way.
To be noted also that more and more rumors are circulating that the tax treatment of dividends and (partial) liquidation bonus will be aligned in the future (tax rate of 20%?) so that the tax benefit of repurchase of own shares will mainly disappear in the long run.