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6.4. Reserves and Provisions

Reserves and provisions may be booked either under specific legal provisions, or for a number of identifiable events, subject to conditions.  Some important reserves and provisions are as follows:

Provisions on Qualifying Shares

Pursuant to Art. 39(1)(5) of the CGI and Guideline 4B-5-75 of 15 March 1975, the depreciation of a participation may be recorded in a provision which is equal to the difference between:

  • the value of the shares shown on the balance sheet of the parent company (generally, the purchase or contribution value, depending on the way they have been initially acquired); and
  • the fair market value of the shares at the end of the tax period, which is determined by taking into account not only the value of the shares on the stock exchange for listed companies or the re-evaluated net worth of the company for unlisted companies, but also all other available parameters relevant to the valuation of the shares, such as the price of the shares in recent transactions, the profitability of the company and its liquidation value.

As from 1 January 2007, provisions for the depreciation of the participating shares (excluding participating shares into real estate companies) are not tax deductible (because the capital gains on the same shares benefit from an exemption regime).

Provisions Relating to Non-Qualifying Shares

Shares which do not qualify as a participation for tax purposes may be depreciated through a provision equal, to the difference between the cost price of the shares and their fair market value, which may, under Art. 38 septies of Annex III of the CGI, be determined as follows:

  • for listed shares: the average price of the shares on the stock exchange during the last month of the tax period;
  • for unlisted shares: the probable negotiated value of the shares, i.e. their fair market value at the end of the tax period. In this respect, all available parameters should be taken into account, e.g. the price of the shares in recent transactions, the profitability of the company and its liquidation value.

Since a potential sale of non-participation shares is taxable as an ordinary gain (at the standard corporate income tax rate), the provision is treated as an ordinary charge and is deductible for tax purposes.