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Coronavirus – Profit distribution by way of dividends – Belgium

  • Belgium
  • Coronavirus - Country overview


1. The effects of the coronavirus crisis on Q1 and Q2 2020

A lot of companies ended the 2019 financial year with positive results. However, the management (and the shareholders) of these companies are now confronted with the consequences of the current coronavirus pandemic which is compromising their financial position. Companies are experiencing great uncertainty on how this crisis will impact their cashflow and their business in the near future. Therefore, special attention is to be paid in case of annual profit allocations which companies would carry out in the coming months. Where such profit allocation was for many companies almost an established fact a few months ago, the urge now is to keep such profits within the company itself by building up reserves rather than distributing them to the company’s shareholders.

Profit distributions may consist of standard yearly dividends, as decided upon at the relevant company’s annual shareholders’ meeting approving the annual accounts, but may also include interim dividends, intermediary dividends, directors’ bonuses (“tantièmes”), etc. For ease of reference, we will focus on this commentary with regards to the distribution of dividends.

2. Compliance with dual test required for a valid profit distribution

Important elements and conditions must be taken into account when making dividend distributions. In particular, Belgian companies can only distribute such profits if the distribution passes a double test, i.e. when both the net asset test and the liquidity test are settled.

a. Net asset tests may not have a negative outcome at the time of or as result of the dividend distribution

First of all, pursuant to the net asset test, no dividend distribution can be made if the company’s net assets are negative or would become negative as a result of the contemplated distribution. The company’s net assets are determined on the basis of the latest approved annual accounts or of a more recent statement of assets and liabilities. Such statement is obligatory in the case a distribution is based on the profits of the current financial year. In summary and besides some minor adjustments to be made (as foreseen by law), the net assets are calculated by reducing the total assets with the provisions and debts. The net asset test must be carried out by the shareholders’ meeting except when the distribution of an interim dividend is envisaged. In that case, it is up to the management body to perform the net asset test.

b. Liquidity test requires the management body to make a twelve month cashflow estimation based on reasonably foreseeable developments

Secondly, the decision to distribute a dividend can only take effect once the company’s management body has determined that, according to reasonably foreseeable developments, the company will still be able to pay its debts over the course of the twelve months following the dividend distribution. This is known as the “liquidity test”. All considerations, in line with the above, should be taken into account and the decision for the distribution must be led and justified by the management body in a special (but non-public) report. The liquidity test is an extremely important exercise as it involves the directors’ joint and several liability. Contrary to the net asset test, the Belgian Companies and Associations Code does not provide a specific calculation method for this liquidity test which means that the management body is given more discretion in its assessment hereof. Insofar a statutory auditor has been appointed, the latter has to assess the historical and prospective accounting and financial information of the special report made by the management body.

c. Serious sanctions in case of violation of the distribution rules

Besides the joint and several liability of directors for a wrongful dividend distribution in the context of the evaluation and interpretation of the liquidity test, the company itself can claim the repayment of any dividend distribution that has occurred in violation with the net asset and liquidity test, despite the shareholders’ good faith or not. Moreover, directors can be criminally sanctioned, with fines and even with imprisonment, if the distribution rules of both the net asset and the liquidity test are not followed. It must be noted that, despite the fact that the net asset test is presented as an exercise which, in principle, the shareholders’ meeting must perform, the management body can be criminally sanctioned in the case of non-compliance. Therefore, we strongly recommend that both legal bodies are involved in carrying out such test.

3. The newly introduced liquidity test is in reality only an explicit reconfirmation of an already existing general principle

Since the new Belgian Companies and Associations Code came into play, the liquidity test has been promoted as a new and more stringent test to be passed for distributions in a BV/SRL, as counterweight for the absence of any share capital – as introduced by this new Code – for this type of company. Although only explicitly regulated for the BV/SRL, it should be noted that the principles of the liquidity test also apply to other types of companies, in particular the NV/SA. Indeed, also in a NV/SA, as a general principle of directors’ duty, directors may not proceed to a profit distribution if such distribution would result in any reasonably foreseeable payment difficulties for the company. Hence, a violation of this general principle would also give rise to the directors’ liability and the possibility to set aside the dividend distribution (by means of the so-called actio pauliana meaning that the non-opposability of the dividend distribution and a repayment of the distributed dividend could be claimed).

4. The coronavirus crisis hinders a forward-looking assessment of reasonably foreseeable developments and thus complicates companies’ decisions on profit distributions in 2020

It is clear that an intended dividend distribution requires a forward-looking evaluation and that the current coronavirus crisis requires extreme caution in this respect. The current uncertainty surrounding the course and the duration of the coronavirus pandemic makes it extremely difficult to assess which developments are "reasonably foreseeable" over a period of twelve months. All possible elements, even those deeming to have a minor impact for now, should be diligently evaluated, which entails an important liability risk for directors and even at times for shareholders. Therefore, declaring a dividend in the present unstable climate is possible but remains a tricky decision. A first option could be to have a yearly dividend declared by the annual shareholders’ meeting, but to postpone its actual payment to a later date when there is more clarity regarding the coronavirus impact on the liquidity position of the company. This means that the shareholders will then have a claim against the company for the payment of their declared dividend. Another option is to cancel the yearly dividend and to have an intermediary dividend declared on a later date once it is certain that such distribution will not jeopardize the company’s financial situation and its continuity.

In this respect and in order to boost banks’ capacity to absorb losses and support lending to households, small businesses and corporates during the coronavirus pandemic, the European Central Bank has asked banks to refrain from dividend distributions over the 2019 and 2020 financial years until at least October 2020. Insurance companies have also been asked the same question by their European supervisor Eiopa.

Due to the current coronavirus pandemic, it is strongly recommended that companies, whether they are large, medium-sized or small, deal with any intended profit allocations in a very diligent and strict way.

For any further questions on this topic or legal advice, please contact our corporate experts Koen Devos and Evy Verhaeghe.