A company may invest its cash surplus. When doing so, it must take into account the tax consequences of that investment. The corporation tax reforms in the Law of 25 December 2017 have made investing in shares of individual shares less attractive from a tax perspective. A DRD Bevek could be a good alternative. The key points you need to be aware of if you are considering making a company investment in a DRD Bevek are set out below.

The Belgian corporation tax reforms imposed significant restrictions on eligibility for exemption from capital gains on investments in shares. Prior to the corporation tax reforms, the conditions for eligibility were as follows:

• Holding period condition: the company must hold the shares in full ownership for a continuous period of at least one year
• Taxation condition: in brief, this means that the profits of the company in which the investment is made must be taxed under the normal corporation tax regime.

• Holding size condition: at the time of disposal, the participating interest in the underlying company must amount to at least 10% or have an acquisition cost of at least 2,500,000 euros.

A DRD Bevek is an investment company that has to meet a number of conditions. For example, a DRD Bevek must distribute at least 90% of certain net income it earns. Investing in a DRD Bevek is a tax-efficient investment alternative, because the investing company does not have to meet the holding period and holding size conditions in order for dividend received to be exempt from corporation tax in relation to the DRD coefficient.

A DRD Bevek can receive both qualifying and non-qualifying income. Qualifying income is income from shares that meets the taxation condition. The ratio between these incomes is continuously calculated and translated into the ‘DRD coefficient’. Specifically, the company investor can:

• benefit from the DRD deduction on the dividends received by the DRD Bevek in proportion to the DRD coefficient.
• if it sells shares in the DRD Bevek to a third party with a capital gain, exempt that capital gain in proportion to the DRD coefficient. In practice, a sale to third parties will rarely if ever occur. The DRD Bevek will almost always buy back (and immediately cancel) its own shares. In that case, the company-investor realises a redemption bonus (= dividend), to which it will be able to apply the DRD deduction.

The example below illustrates the difference in return between investing in an individual share (capital gain fully taxable) and in a 100% equity fund with DRD, based on a DRD coefficient of, say, 97%.

^{(*) assuming that the company concerned is taxed at the standard corporation tax rate (25%)}

• Capital losses on DRD Beveks are not tax-deductible. However, this also applies to capital losses on individual shares or other Beveks.
• If the company-investor makes insufficient profit in a given taxable period to deduct the dividends or redemption bonuses received from its taxable base, the DRD deduction can be carried forward indefinitely.
• The DRD Bevek is required to withhold the appropriate withholding tax when distributing or awarding a dividend. The withholding tax applied is deductible and can be reclaimed by the company-investor (as is the case with individual shares and Beveks).
• Under certain conditions, SME companies can apply the reduced corporation tax rate of 20% on the first 100,000 euros of their taxable base. One of the conditions stipulates that the company may not invest excessively in shares (more than 50% of a specific equity). In addition to individual shares, it must also count investments in Beveks and DRD Beveks.
• Investing in a DRD Bevek affects the calculation basis of the notional interest deduction. In practice, this is usually of very little significance, given the current very low interest rates and the changed basis of calculation (based on incremental equity).
• The investment in a DRD Bevek should match the investor profile of the company concerned.
• If the company has continual cash surpluses, it may consider withdrawing the cash from the company first and then investing it privately.

The DRD (dividend received deduction) is a tax exemption scheme applying to businesses that invest in the shares of other businesses. The actual tax treatment will depend on certain elements of the DRD Bevek itself and on the individual situation of the company concerned. It is important to bear in mind that the tax rules may change in the future.

• DRD Beveks invest in shares. This generally means more fluctuations in the value of the fund, but also the prospect of better returns in the longer term.
• It should also be borne in mind that these DRD Beveks do not offer a fixed return, offer no capital protection and do not have a maturity date.

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