Capital gains taxation. Share buybacks: status and issues

Writing this blog led to the somewhat surprising realization that the Explanatory Memorandum accompanying the new generalized capital gains tax confirms that a share buyback, for selling natural persons, is not always a fiscally clumsy technique—provided that the formerly standard reclassification of the “proportional buyback” as a dividend distribution does not rear its head.

Re-examining the withholding tax exemptions for “stock exchange” buybacks reveals that the legal text (read together with the Explanatory Memorandum) likely results in a logically coherent framework in practice, where the situation of a “public purchase offer” may still deserve attention (no withholding tax).

In this blog, I felt compelled to touch upon the various, sometimes highly divergent, dimensions of the “buyback of own shares.” Feel free to dive diagonally into the section that concerns you:

• The central question
• The link between corporate law and tax law
• The theoretical outline of the fiscal framework
  • Immediate cancellation of shares and equivalents
  • (Temporary) retention of shares
• Application of the new generalized capital gains tax to the buyback bonus
• The “stock exchange” buyback
• The public purchase offer

The Central Question

Illo tempore… a share buyback was fiscally treated as a sale by the shareholder and a purchase by the company—thus a capital gain for the seller and an asset acquisition for the buyer. This is how economists view the transaction, as emerged from discussions within the High Council of Finance when the current tax regime was under review.

However, the key observation, in my view, is that a share buyback encompasses very diverse realities. Fiscally, it may therefore be less straightforward to capture, as is increasingly evident today.

The technique is used:

• By listed companies to:
  • Make temporarily idle liquidity available to shareholders;
  • Serve as a “good investment” if the company’s return-on-equity exceeds that of other investment opportunities;
  • Acquire “treasury shares” to fulfill obligations under employee stock option plans;
  • And… horresco referens… to support the stock price in a setting dominated by “managerial economics”;
• By operational entities to repay part of the provided equity to shareholders, sometimes following a divestment that leads to a “contraction” of the company;
• By smaller companies as a tax planning technique (see further).

Since 1989, it was (quite resolutely) decided that buybacks which indeed leed to actual “distributions” of reserves by a company should be fiscally treated as “dividend distributions.” This applies whenever the payment for the share buyback is followed by cancellation of the shares and disappearance of the associated equity. The equity disappears into/towards the hands of the shareholder, which is classically characteristic of the dividend definition.

The fact that these shares may not be cancelled (but held for later resale), and that withholding tax is necessarily tied to the moment of the “granting” or “effective attribution” of income and cannot easily be retroactively applied (cf. 2016 court case, see further), required the development of a tax regime that can lead to divergent outcomes.

The new capital gains tax text confirms this trend and, in my view, leads to a fairly workable and consistent distinction between situations where the buyback results in a dividend and those where it leads to a capital gain realization by the selling shareholder—with a 10% levy for natural person shareholders starting 1 January 2026.

The Link Between Corporate Law and Tax Law

The treatment, requirements and consequences under corporate law, differ quite substantially from what is being considered under tax law. There is no real parallelism that can be detected because the two regimes serve different purposes.

Without aiming for corporate law completeness, the following elements seem relevant:

• A valid share buyback requires compliance with corporate law decision-making conditions, with the general meeting playing a central role. If these conditions are not validly met, the shares acquired are deemed immediately cancelled for tax purposes, triggering the “dividend regime” of Article 186 ITC92, withholding tax, etc. I’ve seen cases where financial institutions bought back shares in trading contexts without a valid general meeting framework, leading to unexpected tax issues.
• Corporate law no longer imposes a maximum percentage of outstanding shares that can be bought back and held. The previous 20% cap was removed. Tax law still applies this threshold: exceeding 20% means the additional shares are deemed immediately cancelled, triggering the dividend regime. Notably, Article 186 ITC92 allows the acquiring company to designate which purchased shares caused the threshold breach. In the absence of such designation, proportional allocation applies.
• Corporate law allows buybacks only if the company has “distributable profits” on its balance sheet—i.e., distributable reserves. The company’s share capital remains untouched. A capital reduction is a completely different operation requiring amending the articles of the company, and triggering various stakeholder protection provisions.

Tax-wise, the situation is entirely different: a share buyback (with cancellation) and a capital reduction lead to an almost identical result. On the one hand, the net asset reimbursement which is deemed to occur in the framework of a share buyback with annulment of the shares is proportionally allocated to capital and reserves represented by the cancelled shares, partly including, as a result, a (withholding tax-free) capital repayment. On the other hand in case of a formal stated capital reduction, article 18, second paragraph ITC92, provides that the repayment to the shareholders that occurs is also proportionally allocated to paid-in capital and reserves. In both cases, the allocation to reserves occurs first on taxed reserves, which is tax favourable (allocation to exempt reserves triggers corporate tax). The only minor difference is that in capital reductions, exempt reserves that have been incorporated into capital are excluded from the capital calculation (they’re counted as reserves), while in buybacks, they’re not specifically mentioned.

These differences mean that companies engaging in one of these transactions often show little correlation—let alone alignment—between accounting figures for capital and reserves and what is fiscally recorded in the company’s “reserve statement.”

One final company law observation

Current company law allows the Articles to stipulate that (certain) shares may be bought back by the company without the requirement of a specific general meeting decision. This “redeemable shares” technique, long known abroad, seems particularly useful in private equity contexts. It allows for the issuance of “temporary equity,” repayable under conditions—like a loan repayable at the debtor’s initiative. The “redeemable shares” approach constitutes, in my view, a surprisingly efficient and useful technique, a new “corporate finance” dimension, still surprisingly underused in practice.

The Fiscal Framework – Technical Outline

Buyback Leading to a Reduction of Equity – Cancellation of Own Shares

The application of Articles 186 to 188 in conjunction with Article 18, first paragraph, 2ter of the Belgian Income Tax Code (WIB92) results in a share buyback being treated, for the acquiring company, as “distributed profit” (a dividend), and for the receiving shareholder as a “dividend”—to the extent that the purchase price is not proportionally allocated to the paid-in capital of the acquiring company.

With all the consequences that entails.

In other words: the buyback itself is fiscally a non-event, at least for the acquiring company. Cash on the assets side of the balance sheet is replaced by own shares. Standard practice—though certainly not always—is that the next step involves cancellation of the own shares. This removes the asset entry and results in a corresponding reduction of equity. This reduction is proportionally allocated to what is fiscally considered “paid-in capital” and the remainder to the company’s reserves, resulting in:

• Allocation to paid-in capital leads to a payout without corporate income tax and without a taxable dividend distribution (no withholding tax);
• Allocation to reserves leads to a “dividend” taxable for the shareholder as dividend income (typically subject to final withholding tax), with the distinction that:
  • First, the allocation is made to “taxed reserves” of the acquiring company, so no corporate tax is due;
  • If necessary and unavoidable, allocation is then made to “exempt reserves,” which does trigger corporate tax for the acquiring company.

For the shareholder, the amount allocated to reserves is treated as follows:

• For natural persons: subject to 30% final withholding tax (unless exempt—see further), or otherwise reportable[1];
• For companies: eligible for the DRD (dividend received deduction) provided the quantitative and qualitative conditions of Articles 202 and 203 WIB92 are met.

As mentioned, immediate cancellation does not always occur. Tax law lists two other situations that, after a buyback, also lead to a reduction in equity and thus to a “distributed dividend”: namely, booking a value reduction on the held own shares, and selling them to a third party at a price below the purchase price. All logical.

Finally, if the acquiring company is dissolved and liquidated, the repurchased shares also disappear, but this results in a “mega-dividend distribution” equal to the entire equity above the paid-in capital.

So far, logical, clear, and coherent.

Buyback with retention of own shares – No (immediate…) reduction of equity

This dimension of the regime has led to some issues from the outset, which today may be increasingly resolved.

The question is not so much what happens if the company retains its own shares and later sells them at a gain. At that point, there is never a “dividend,” since there is no reduction in equity, no net asset value has been transferred from the company to the shareholder.

It is also possible that the company initially retains the shares and, after a certain period—often at least in the next taxable period—proceeds to annul them or sell them at a loss. The problem is that withholding tax must be applied at the time of payment of the buyback price. It is indeed the effective attribution or payment of movable income that triggers the withholding. It is virtually impossible to recover this tax at a later time from the original selling shareholder, who is often unaware of any later cancellation or loss-making sale.

The initial administrative circular was relatively creative and above all realistic (though slightly laconic). It stated that in such cases, the company could “bear” the unpaid withholding tax. The minor issue is that bearing the tax may result in a non-deductible expense (acceptable), but also triggers a “grossing-up” calculation, since the shareholder is then deemed to have received the (gross) amount as a net amount after withholding tax. Not straightforward.

Hence my appreciation for the circular’s passage where the administration stated that in practice, issues would rarely arise because “the acquiring company knows from the outset what its plans are.” Legally original, but so reasonable and sensible that it deserves praise.

Still, for natural persons, there remains a certain “flou artistique” in cases where a transaction later leads to a reduction in the company’s equity. Until recently, this was a relatively harmless ambiguity, since the question of whether a taxable capital gain was realized was irrelevant—the gain was tax-exempt anyway.

The situation is different for corporate shareholders. Especially “back in the day” when the DRD amounted to 95% of received dividends and capital gains were 100% exempt. Here, the judgment of the Liège Court of Appeal of 27 April 2016 is relevant, along with the administration’s very positive response.

In short, the judgment correctly states that the transaction leading to a “distributed dividend” under Article 186 WIB92 must occur in the fiscal year in which the selling company receives the buyback price (and records it as profit). There is no basis for retroactively qualifying a later transaction at the level of the company redeeming its shares, as affecting the original tax treatment at the level of the selling company after the buyback year. If no equity reduction occurs in the buyback year, then for the selling company there is no dividend—only a realized capital gain.

This analysis was accepted by the administration and has since been consistently applied for selling companies. Note, however, that for the acquiring company, Article 186 WIB92 continues to apply whenever the transaction occurs. A diverse regime indeed.

Incidentally, in a world where both “dividends” and “capital gains” can be 100% exempt under the same conditions, there is no real fiscal-financial issue.

But… for natural person shareholders, this is precisely where the new generalized capital gains tax comes into play!

Temporarily holding the repurchased shares can thus avoid the 30% withholding tax on the portion of the buyback price exceeding the capital represented by the shares, and instead trigger the new 10% capital gains tax. I’ll elaborate on this in the next paragraphs. A potential tax saving—but one that revives an old debate.

If a company proceeds with a proportional buyback from all shareholders, without any evident motive other than making cash available to shareholders on the basis of available distributable profits, thereby avoiding an otherwise logically expected dividend distribution, we have a textbook case for applying Article 344, §1 WIB92: the general anti-abuse provision. The buyback can then be reclassified as a dividend distribution, subject to the usual tax inspection timelines.

The findings in this blog certainly do not imply a fiscal carte blanche. And given the relevance to shareholder interests, one will likely seek advance certainty via a ruling—especially if the buyback does not clearly involve the exit of a single shareholder. The ruling policy in this area already seems highly predictable…

Application of the new generalized capital gains tax to share buyback gains realized by individual shareholders

The Explanatory Memorandum accompanying the new capital gains tax includes an instructive and clear passage on the concept of “type coercion” in personal income tax. Income is taxable only if it qualifies under one of the four taxable income categories. A given income component can only fall under one of these four categories—they are mutually exclusive.

In other words, the capital gains tax cannot apply to income that is clearly defined as movable income under the provisions of the Belgian Income Tax Code (WIB92). However, it can apply to proceeds that fall outside the definition of dividends.

That much is clear.

This means that a buyback gain related to immediately cancelled shares triggers the regime that treats the excess (above paid-in capital) as “distributed profit”—i.e., a dividend under Article 18, first paragraph, 2°ter WIB92. Therefore, no capital gains tax applies. Again, clear.

But what if, in 2026, an individual realizes a buyback gain and the acquiring company does not cancel the shares—or at least not during 2026? In that case, no withholding tax will be levied. And for the 2026 tax year, there is no movable income.

Should we then, by reference to the so-called “annuality principle,” conclude that this 2026 income receives its definitive tax qualification in that year? No movable income, but a sale at a price above acquisition cost—thus a realized capital gain? Possibly with application of the “snapshot value” as of 31 December 2025 for calculating the taxable gain?

I believe so. And for the first time, this consideration has a concrete fiscal consequence: the capital gain is now taxable at 10%.

This is entirely logical. We move from a 2025 situation with 30% withholding tax upon cancellation and no tax on movable income or capital gains, to a 2026 situation with 30% withholding tax upon cancellation and a 10% tax on capital gains if there is no immediate reduction in equity. Until now, a realized buyback gain—if not treated as a dividend—fell outside the four taxable categories, as none of the miscellaneous income types listed in Article 90 WIB92 included such gains. As of 2026, this gain is included under the new Article 90, first paragraph, 9°, c.

In short: the buyback bonus is now always taxable—either at 30% via withholding tax (on the portion of the buyback price exceeding paid-in capital), or at 10% (on the full realized gain) under the new generalized capital gains tax.

This analysis is also confirmed in the Explanatory Memorandum, which rightly states:

“Consequently, in the case of a buyback of own shares where one of the situations referred to in Article 186, second paragraph, WIB92 occurs during the same fiscal year (namely, any transaction leading to a reduction in the equity of the acquiring company), the shareholder will be taxed on the portion of the excess of the acquisition price over the revaluation share in the paid-in capital represented by the transferred shares, as a dividend.

Conversely, in the case of a buyback of own shares without any of the situations referred to in Article 186, second paragraph, WIB92 occurring during the same fiscal year, the shareholder will be taxed on a capital gain on a financial asset, equal to the difference between the received price for the onerous transfer of the shares and their acquisition value.”

What about buybacks “on the stock exchange”?

In theory, the same treatment applies. However, legal provisions and practical obstacles stand in the way.

When a listed company buys back its own shares “on the open market,” Article 264, first paragraph, 2°bis WIB92 provides an exemption from withholding tax—even if the company immediately cancels the shares. The rationale is clear: the selling shareholder transacts “in the market” and cannot know whether he is selling to a third party or to the company itself.

Despite the withholding tax exemption, a buyback followed by cancellation (or any transaction reducing equity) is still defined as “movable income” under Article 18, first paragraph, 2°ter WIB92—especially if cancellation occurs in the same tax year. Under the principle of “type coercion,” no capital gain would be realized, and the new capital gains tax would not apply.

However… the withholding tax exemption exists solely because the seller does not know he is selling to the company. This reality also affects the new capital gains tax.

The only logical conclusion is that every sale of shares on the market triggers the new capital gains tax. In theory, this applies unless the seller can prove he sold in the framework of a buyback and that the shares were immediately cancelled. But such proof is practically impossible due to market mechanics. The absence of this information was the very reason for the withholding tax exemption.

So the final situation is quite logical:

• Every sale of listed shares on the market is, de jure or de facto, subject to the new capital gains tax;
• The fact that the acquiring company does not need to withhold tax is a welcome mechanism to avoid double taxation. This exemption should be maintained—or better yet, and here’s my legislative recommendation: move the exemption case into Article 186 WIB92 itself, so that no movable income arises. But that legislative change is unlikely to happen (for now).

What about a public takeover bid for own shares on the stock exchange?

A listed company may launch a buyback program executed via market purchases with withholding tax exemption. However, this is not possible for a public takeover bid for own shares. Market purchases must be spread over time to avoid sharp price increases in often illiquid markets. Hence, a public takeover bid is executed “off-market” at a fixed offer price.

In practice, such transactions always involve a financial intermediary acting as broker, making it virtually impossible to track which sellers accepted the offer and what the withholding tax implications are—especially if the equity-reducing transaction triggering Article 186 WIB92 occurs after the offer ends and the intermediary has exited the transaction. This differs from a block trade, which also occurs off-market but involves direct negotiation between buyer and seller with full information.

Given the wording and approach in the Explanatory Memorandum, the acquiring company might consider postponing cancellation of the shares to a later period. But this is rarely the intention—the company typically wants to reflect the transaction accurately in its balance sheet immediately after the offer closes.

Given the now generalized application of the capital gains tax, the time may be ripe to extend the existing withholding tax exemption to cover these specific transactions—so they can once again be executed in Belgium. Currently, that is not the case.

Finally… Other transactions involving the acquisition of own shares

The regime under Article 186 in conjunction with Article 18, first paragraph, 2°ter WIB92—which defines a dividend when transactions involving repurchased shares lead to a reduction in equity—applies to any transaction or situation where a company acquires its own shares.

A textbook example: the reverse parent-subsidiary merger, where a subsidiary absorbs its parent and thereby acquires a block of own shares.

But let’s reserve that topic for a future blog post on issues related to corporate mergers. The new legislation on mergers between sister companies certainly warrants it.

[1] The reduced 15% dividend withholding taks rate (VVPR) is not applicable to share redemption or liquidation proceeds.