Exit guarantee for shareholders via put option, buyback of own shares or withdrawal?

Many shareholder agreements contain provisions setting out exit mechanisms allowing shareholders to exit the shareholding in the future, for instance when a shareholder is no longer operationally involved (hereinafter the “departing shareholder”), e.g. a put option (“verkoopoptie”), a withdrawal right (“uittredingsrecht”) or a mechanism of buyback of own shares by the company (“inkoop van eigen aandelen”).

In case of a put option, the departing shareholder can oblige the other shareholders to purchase his shares and pay the purchase price. In the event of a withdrawal or buyback of own shares, the buyout will be funded by the company itself.

Whether the funds for the buyout are provided by the co-shareholders (put option) or the company (buyback of own shares/withdrawal) will make little difference to the departing shareholder. However, the exit technique used may give rise to different tax consequences for the departing shareholder.

In terms of taxation, the capital gain received by the transferring shareholder following the exercise of a put option will be considered as a (where applicable, tax-exempted) capital gain on shares. An exemption applies to shareholder-companies if they hold more than 10% of the shares (or the acquisition value exceeds 2,5 million euro) and the participation is being held over a period of more than 1 year. An exemption applies to shareholders-natural persons if the transaction qualifies as a normal operation of private asset management (“normale verrichting van beheer van privévermogen”).

The distribution of a severance share (“scheidingsaandeel”) upon withdrawal will however, from a tax point of view, be considered as a distributed dividend subject to withholding tax insofar as the distribution exceeds the shareholder’s part in the fiscally paid-up capital (art. 187 and art. 18, § 1, 2° ter ITC92 (“WIB92”)). For the private limited company (“besloten vennootschap” or “BV”), which has no capital under corporate law, the fiscally paid-up capital is equal to the actually paid contributions in cash or in kind, other than contributions of performances (“inbreng van nijverheid”), and insofar as no refund or reduction has occurred (art. 2, §1, 6° and art. 184, § 1 ITC92). For the part of the distribution that corresponds to the fiscally paid-up capital, the proportional allocation on the actual paid-up capital and reserves applies, as is the case in the situation of a capital decrease. Shareholders-companies can benefit from the so-called “DBI”-deduction if the participation represents more than 10% of the share capital (or the acquisition value exceeds 2,5 million euro) and has been held for more than 1 year. Shareholders-natural persons will be subject to withholding tax on the part that exceeds the fiscally paid-up capital and on the proportional part of the paid-up capital that corresponds proportionately to the reserves.

The tax treatment of the distribution that the shareholder receives upon a buyback of own shares is the same as the one applied to the distribution of a severance share (art. 186 ITC92). At least this is the case if the purchasing company annuls the acquired shares within the financial year that it purchased the latter, or if the purchasing company already holds own shares in portfolio whose nominal value represents more than twenty percent of the capital subscribed to. To guarantee tax neutrality following the approval of the new Companies and Associations Code, the twenty percent limit that was abolished under corporate law was reintroduced under tax law. Acquired own shares exceeding this limit are deemed to have been annulled for tax purposes at the time of acquisition (art. 186, § 6 ITC92). The distribution that exceeds the fiscally paid-up capital then qualifies as a dividend distribution. For the part that corresponds to the fiscally paid-up capital, the pro rata allocation to actual paid-up capital and reserves also applies here.

In case the purchasing company does not yet hold own shares in portfolio that exceed 20% of the capital, and the purchased shares are not annulled during the financial year of the purchase (and no other cases of equity loss apply during that financial year as stated in art. 186 ITC92), then the price for the buyback of own shares that exceeds the fiscally paid-up capital will be qualified as a realized capital gain on shares (Circ. 2017/C/12). For a shareholder-natural person who acts within the scope of normal private asset management, the purchase of own shares is in this hypothesis more tax-efficient than a withdrawal.

If stipulating a put option is not acceptable to the co-shareholders (for instance because they do not want to use their own resources), there may be circumstances in which a buyback operation is fiscally more attractive for the departing shareholder than a withdrawal.

Even though there may be advantages to organizing an exit through a share buyback instead of through a withdrawal, the initiative for a buyback of own shares does not lie with the departing shareholder. While a withdrawal in the private limited company, included in the articles of association, creates exit certainty for the shareholder, it is on the contrary the company itself that must initiate a buyback of shares. Shareholders can however try to obtain certainty of buyback by inserting voting arrangements in the shareholders agreement.

Another obstacle that might prevent a share buyback, is the requirement that the company must have sufficient resources at the time of the buyback that are “distributable”. In concrete terms, the “net assets test” must give a positive result, as well as the liquidity test in case of private limited companies. A withdrawal is a better exit guarantee as a failure of the tests only leads to a deferral of payment, while a put option is the best exit guarantee in this context as it does not require any test at all. This uncertainty can be eliminated by providing in the shareholders agreement for another exit mechanism (such as a put option) in second order (more specific when the buyback of own shares by the company does not take place or would not be possible).

Anneleen Steeno, intui attorneys

anneleen.steeno@intui.be