Investing your company's cash surplus: do you know the 5 options?
At certain times, your company may have excess cash that you do not need immediately for your business activities. In these cases, investing is an interesting path forward. More specifically, you have five options, each with its own tax advantages and disadvantages and a different impact on your net return.
Why should you invest?
In times of skyrocketing inflation, it is not recommended to park cash surpluses in a current account or savings account. Investing your excess cash increases the potential return for your company.
These are your best options:
- A term deposit account – the safe option
- Listed shares – beware of the capital gains tax
- DBI Beveks/Sicavs RDT (open-end investment company) – tax-beneficial alternative to shares
- Insurance products – wide variety available
- Tax shelter – tax-friendly investment in the creative sector
1. The term deposit account
A safe way to invest cash surpluses is with a term deposit account with a fixed and guaranteed interest rate. The term ranges from short (1, 3, 6 or 12 months) to longer terms (2 to 10 years). In general, the longer the money is locked up, the higher the interest rate. Some banks may apply a minimum deposit.
You pay 30% withholding tax on the interest you earn from a term deposit account, but this tax is deductible from your corporate income taxes (at 25% or 20%).
| If your gross interest rate is ... | ... then your net interest rate (taxed at 25%) is |
... then your net interest rate (taxed at 20%) is |
|---|---|---|
| 4.10% | 3.08% | 3.3% |
| 3.5% | 2.6% | 2.8% |
| 2.7% | 2% | 2.2% |
For example, say your company invests €500,000 of available reserves in a term deposit account for 12 months with a gross interest rate of 4.10%. Your earned interest is taxed at 20%, so the net yield after one year is 3.3% or €16,500.
2. Listed shares
Shares are another classic investment product. You give your money in exchange for a participation in the capital of a company. Investment shares that you buy and sell through the stock exchange are listed shares.
If you invest in such shares, you basically pay 20% or 25% corporate income tax on the realised capital gains. However, if you meet the following 3 conditions, you do not have to pay any (capital gains) tax:
- your company is subject to Belgian corporate income tax or a similar foreign tax system (taxation condition).
- your company retains full ownership of the shares for at least 1 year (holding period).
- the investment participation amounts to at least 2.5 million euros or at least 10% of the capital of the company in which you invest (participation condition).
Of course, such large amounts are rare for SMEs. Your SME will therefore usually be subject to the capital gains assessment, making this tax-friendly option less interesting for you.
3. DBI Beveks/Sicavs RDT shares
An investment in DBI Beveks/Sicavs RDT shares are a tax-friendly alternative to traditional stock investments. If you invest in a DBI Beveks/Sicavs RDT (open-ended investment company), you can sell your shares tax-free.
Restrictions do apply to DBI Beveks/Sicavs RDT:
- The income must be earned directly from shares, i.e. not from other investments such as debentures or other funds.
- Profits must be generated from so-called 'good' shares, from companies that are not based in tax havens and pay normal taxes on their profits.
- The Bevek/Sicav must pay out at least 90% of its income annually.
How much capital gains tax are you paying now?
| Listed shares | Bevek/Sicav shares | DBI Beveks/Sicavs RDT shares |
|---|---|---|
| Capital gains taxable | Capital gains taxable | Capital gains exempt |
| Capital loss not deductible | Capital loss not deductible | Capital loss not deductible |
| Basic rate 25% or reduced rate of 20% subject to conditions | Basic rate 25% or reduced rate of 20% subject to conditions | Basic rate 25% or reduced rate of 20% subject to conditions |
4. Insurance products
Your company can also invest in so-called Branch 21 and Branch 23 insurance plans. The first is a kind of savings insurance plan with a guaranteed return. The second is an investment insurance plan where your revenue depends on the fund you invest in.
Although they sound similar, they are very different:
| Branch 21 | Branch 23 |
|---|---|
| Guaranteed capital and return | Capital and return are not guaranteed |
| Premium tax of 4.4% | Premium tax of 4.4% |
| Uncertain profit-sharing | Uncertain profit-sharing |
|
Contract less than 8 years: 30% withholding tax on notional return of 4.75% per annum
|
Exempt from withholding tax Exception: with a guaranteed return, you must pay withholding tax if you sell within 8 years |
| Contract longer than 8 years: exemption from withholding tax (offset in corporate income tax) | |
| No impact on possible reduced rate | No impact on possible reduced rate |
In addition, two other tax-friendly alternatives exist: Belgian Branch 26 and Luxembourg Branch 6 insurance.
| Branch 26 | Branch 6 |
|---|---|
| No annual payout: fixed-term contract with fixed payout date | No annual payout: fixed-term contract with fixed payout date |
| Guaranteed capital and return | Capital and return are not guaranteed |
| No premium tax | No premium tax |
| Uncertain profit-sharing | Uncertain profit-sharing |
| 30% withholding tax on global return and profit-sharing, offset in corporate income tax |
30% withholding tax on all value increases |
| Capital losses deductible as business expenses | Capital losses deductible as business expenses |
| No impact on possible reduced rate | No impact on possible reduced rate |
So as you can see, the world of insurance products offers several tax-friendly options. The best choice for your company will depend on whether or not you require guaranteed capital and return on the one hand, and the duration of the contract on the other.
5. Tax shelter for audiovisual works, performing arts and video games
Finally, your company can also invest its cash surpluses in the production of audiovisual works, performing arts or video games. The government uses the tax shelter as an incentive to encourage companies to invest in these creative sectors. You receive a tax benefit which depends on the amount you invest.
The investment consists of several steps:
-
Your company enters into a framework agreement with an approved production company, possibly through an approved intermediary.
-
Then you have to deposit the agreed sum within 3 months and the production house has 18 months (24 months for animation films) to use the deposited sum to fund the production of an audiovisual work, performing arts or video game.
-
Your company receives a provisional tax exemption on the sums paid, with a cap of:
-
421% of the invested amount
-
203% of the expected tax value of the tax shelter certificate
-
50% of the taxable reserved profit with a maximum of 1 million euros/year
-
-
Upon completion of the project and (timely) delivery of the tax-shelter certificate, your company can obtain a final tax exemption.
Summary
The conclusion is that each investment option has its own pros and cons from a tax point of view and a different impact on your net return. So be sure to consult with a specialist who can guide you through the maze. And make the smartest choice for your company.
Is it difficult to choose between the different investment options?
Let our tax advisors help you be smarter, they are at your disposal.
