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You've just signed the loan agreement with KBC or BNP Paribas Fortis, and you're working through the covenants. Somewhere between the reporting obligations and the leverage test, you find a clause stating that your company may not pay any dividend without the bank's prior written consent. You took that loan to buy equipment, not to hand control of your profit distribution to a lender. And yet here it is. This article explains what that clause actually means, why it exists, and where you can push back.
What Is a Dividend Restriction?
A dividend restriction is a negative covenant, a standing prohibition, that limits or blocks your company from distributing profits to shareholders during the loan. It typically covers ordinary dividends, interim dividends, liquidation reserve distributions, and, depending on how broadly the clause is drafted, management fees paid to affiliated companies you own. In its most conservative form, you cannot pay out a single euro without a formal written consent from the bank. In a more flexible version, distributions are permitted provided your company meets certain financial tests at the time of payment, usually a leverage or debt service coverage ratio, with no event of default in progress.
This covenant sits on top of the distribution rules already embedded in Belgian company law. Under WVV Article 7:212–7:213 (BV/SRL) and Article 7:230 (NV/SA) — the uitkeringstest — your board must pass both a net asset test and a liquidity test before any dividend can legally be paid: your board must confirm the company will remain able to pay its debts for at least twelve months after the distribution. The bank covenant does not replace these requirements; it adds a contractual layer on top, so a distribution that passes the Belgian legal tests may still be blocked by your covenant.
Why Your Bank Requires It
Every euro paid out as a dividend is one less euro available to service the loan. The bank's concern is that your business retains enough cash to meet repayment obligations, especially in a difficult year. Belfius uses a "cash trap" in asset-backed SME facilities: if your debt service coverage ratio falls below around 1.15x, excess cash is automatically frozen and directed to debt service. ING Belgium and BNP Paribas Fortis more commonly tie dividend permission to a leverage test. The underlying logic is the same — retained earnings are your balance sheet's primary buffer, and the bank wants that buffer intact. Any distribution that reduces the equity base simultaneously worsens your debt-to-equity ratio — Belgian banks that test both covenants may constrain dividends through two parallel mechanisms.
What It Means in Practice
If your covenant is an absolute prohibition, you need a written waiver before paying any dividend, every year: a formal request, a review period, and typically an amendment fee of 0.25%–0.50% of the facility amount. Belgian banks charge these fees, and they occasionally attach conditions such as additional security or tighter covenant levels.
If your covenant is conditional, you can pay dividends without consent provided your ratios are within the permitted range at the moment of payment, confirmed by a compliance certificate. The risk is assuming your year-end ratios hold throughout the year. Paying an interim dividend in October when your leverage has crept above the threshold since June puts you in technical breach, which typically constitutes an event of default. In practice, KBC and Belfius usually respond with a waiver request rather than calling the loan. That waiver still costs money and gives the bank leverage in your next conversation.
One area that catches owners off guard is management fees. If your company pays a monthly fee to a management company you own, a structure many ITAA accountants set up for tax efficiency, that fee may be treated as a restricted distribution if the clause covers "payments to shareholders or affiliates." Paying it without checking could put you in breach.
Typical Thresholds in Belgian SME Lending
Where Belgian banks permit dividends subject to ratio tests, the common formulations require net debt divided by EBITDA to stay below 2.5x–3.5x after the distribution, and debt service coverage above 1.20x–1.25x. These thresholds are calibrated so that a company near its leverage ceiling will almost always fail the dividend permission test simultaneously. Dividend capacity opens up only when you are comfortably within headroom.
VVPRbis dividends at 15% withholding (increased to 18% under the programme law enacted in June 2026; verify current rate at time of reading) and liquidation reserve distributions fall within the covenant equally. The bank does not distinguish between distribution mechanisms.
What to Watch
Read the definition of "distribution" in your loan agreement carefully: a well-drafted covenant covers not only dividends but also share buybacks, returns of capital, and payments to affiliates. If you have a management company receiving a monthly fee, check whether fees to shareholders are explicitly listed. Also confirm the testing date: some covenants require ratio compliance at the date of payment, others allow testing against the most recent financial statements, which matters if your cash position is seasonal.
Where You Have Room to Negotiate
The most practical angle is a fixed permitted basket — a stated annual amount you can distribute without any ratio test or bank consent, provided no event of default is continuing. A basket of €50,000–€100,000 per year, calibrated to your income needs, gives you predictability for tax planning without a waiver request each time. For management fees, negotiate an explicit carve-out at a stated annual cap: your actual expected fee level. Having that in the covenant itself is far cleaner than arguing later about whether a monthly management fee counts as a restricted distribution.
The fastest way to see whether a Dividend restriction covenant — and every other condition — is in your term sheet is to let Credia read it for you. Upload the PDF and you get every covenant identified and explained, in plain language, in under two minutes.
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Frequently asked questions
What is a Dividend restriction covenant?
A dividend restriction limits or prohibits distributing profits to shareholders during the loan term. Conditions for permitted dividends (if any) are typically specified.
What does a Dividend restriction covenant restrict?
Cash generated by the business is retained for debt service rather than distributed to owners. This affects owner returns and may limit the ability to fund personal obligations or other ventures.
Can you negotiate a Dividend restriction covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Dividend restriction covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.