I am thrilled to have joined the Econopolis team on July 1. With more than 30 years of experience as a tax specialist, estate planner, and trusted advisor to entrepreneurs, entrepreneurial families, and family offices, I look forward to assisting Econopolis’ clients with complex issues related to succession planning, wealth structuring, family transfers, and private investments.
In my first contribution to the newsletter, I’m returning to a topic I wrote about more than eight years ago as a tax specialist: the DBI scheme, in light of the corporate income tax reform. Since then, the framework has changed significantly: the deduction has increased to 100%, the 10% ownership threshold or 2.5 million euro limit does not apply to those investing through a DBI fund, and the regulations were tightened again this year. For entrepreneurs who hold cash reserves in their companies, this is not an issue that can be checked off once and forgotten. In taxation, the greatest cost is often not a wrong decision, but failing to make a decision for years on end.
What is a DBI fund?
A DBI fund provides access to the regime for definitively taxed income without requiring your company to meet the traditional participation and holding period requirements. Normally, the DBI deduction requires a stake of at least 10% of the capital, or an acquisition value of 2.5 million euros, held for at least one year. Through a DBI fund, that threshold and the requirement to hold the shares for at least one year are eliminated: a company with 100,000 euros in cash enjoys the same exemption as an industrial holding company with a strategic stake. The underlying principle remains the same as in 2017: profits that have already been taxed at the company paying the dividend are not taxed again at the company receiving it.
When is a DBI fund relevant?
This approach is relevant in three situations: excess liquidity on the balance sheet that is not needed for day-to-day operations; reserves held within a family holding company pending the next step; and temporary parking places for cash prior to an acquisition or distribution. Whenever funds remain in an account on a structural basis without a clear purpose, this issue deserves a place on the agenda.
How does the mechanism work?
A DBI fund is legally required to distribute at least 90% of its net income annually as a dividend. A 30% withholding tax is first withheld from that dividend, but thanks to a DBI certificate (typically indicating 95% to 100% “purity”), your company may subsequently deduct virtually the entire gross amount from its taxable profit. The result: virtually no corporate income tax on that dividend, and the withholding tax is offset or even refunded. The tax treatment can also be particularly favorable when exiting the investment. When the fund repurchases its own shares, the realized capital gain remains virtually fully exempt in practice. However, following a recent legislative change, a separate 5% tax applies to the exempt portion of the capital gain in the event of a sale to a third party.
A hypothetical example makes the difference tangible. Suppose you invest 100,000 euros, which grows to 150,000 euros after five years, with 12,500 euros in dividends received along the way.
| Traditional Stock Portfolio | DBI Fund | |
|---|---|---|
| Insert | € 100.000 | € 100.000 |
| Value after 5 years | € 150.000 | € 150.000 |
| Realized Capital Gain | € 50.000 | € 50.000 |
| Dividends Received | € 12.500 | € 12.500 |
| Corporate Income Tax | - €15,625 | € 0* |
| Net proceeds | € 46.875 | € 62.500 |
* The exit is effected through the fund’s purchase of its own shares. In the event of a sale to a third party, a separate 5% tax now applies to the exempt portion of the capital gain.
Why This Deserves Your Attention Right Now
The tax benefit is real, but not automatic, and the rules have recently become stricter. For a corporation, this is no minor matter: the offset of the withholding tax on the distributed dividend is now tied to a minimum compensation requirement. For a management company, that payment to the managing director is precisely the crux of the matter. You—or a co-director who is a natural person—must pay yourself at least 50,000 euros in gross salary annually; otherwise, the withheld 30% will remain permanently in the treasury. However, this condition has no impact on any capital gains realized upon a sale or purchase. Companies that wish to retain the reduced 20% SME tax rate must also ensure that their total equity investment does not exceed 50% of their equity. Capital losses are not tax-deductible. Furthermore, DBI funds are not a homogeneous category: they vary significantly in terms of investment policy, diversification, risk, and historical returns, meaning that a purely tax-based analysis is never sufficient.
A DBI fund is not a one-size-fits-all solution for every company. However, for companies with structurally excess liquidity, it can be a highly efficient tool—when used in the right context—for tax-optimizing the return on those funds.
Anyone who waits until today to review their company’s cash reserves is missing out on returns that cannot be recovered. For companies with a structural cash buffer that won’t be needed for five to ten years, a DBI fund can make a significant tax difference, provided the rules regarding compensation, the SME threshold, and the time horizon are applied correctly.
Is a DBI fund a good fit for your company?
Not every company benefits from the same solution. The amount of available cash, the investment horizon, the company’s tax position, and its future plans all play an important role in this regard. We would be happy to work with you to determine whether a DBI fund is a suitable option for your situation.
