Senior level executives, who work for a group of companies, may enter into an agreement whereby they give up certain director fees. This scenario occurs in situations where individuals have several functions and director mandates in a group of companies, whereby it is overally agreed that the total income of the individual (over all group entities) is determined at a certain level.

When income is given up in such way, several tax questions arise, such as:

•  is the director still taxable on the income, to which he is entitled, and which is given up?
• can the director deduct the salary surrender from his taxable income?
• is there a withholding tax obligation by the company, who is paying out the salary?
• which pay documents are to be made up?

A Belgian tax circular of 18 Augustus 2009 covers the tax treatment of director fees, which are given up by a private individual to the benefit of a company. The Belgian income tax authorities accept, under a number of circumstances, that the salary which is given up, is deducted as a business expense from the taxable income of the individual. In such way, the payments are first included in the taxable income of the individual and are subsequently deducted as business expenses.

In order to qualify for tax deduction, the giving up of the director fees must be performed with the purpose to obtain or keep a director mandate and of the related income. Giving up a part of the overall remuneration is part of the overall agreement of the individual with certain group entities.

This approach may not be fully tax neutral, as in the first phase the income is deemed taxable on behalf of the director. This then would result in a withholding tax obligation by the paying entity. The withholding tax can then be recovered by the director by including the income in his personal tax return and by taking the tax deduction, but there is a substantial period of pre financing of the tax before it is actually recovered.

The tax Administration may accept that the operation becomes fully tax neutral by immediately excluding the payment from the taxable income of the individual, whereby no withholding tax is calculated and no deduction is further necessary as a business expense. In such case, the company, which is paying out the remuneration, does not have to include the income in an individual salary statement (fiche 281.20).

In practice, the subject is quite difficult and regularly discussions arise with the local tax inspector. In order to avoid this, one could ask for an advance ruling with the ruling committee.

In 2011, the ruling committee has accepted exemption from taxation on behalf of the director and also the absence of a withholding tax obligation and a reporting obligation (on a fiche 281). This decision dates from 5 July 2011 (reference number 2011.193).

In the case at hand, a French company had asked several senior level executives (who were working as employees of a group company) to take up a director mandate in a Belgian subsidiary company. In line with existing company policies, the employees were asked to give up the remuneration, which they would receive for the director mandates, to the French parent company. To this purpose, an agreement was signed whereby the managers asked the Belgian subsidiary company to directly pay out the director fees to the French parent company.

The ruling committee, however, takes a careful approach and has refused to deliver a ruling in several other situations.

A first case, where a ruling was not issued, is the one of an individual, who was performing his professional activities through the intermediary of his own (one man) management company. He was appointed as chairman of a stock quoted company. This quoted company and it’s shareholders required that the manager would exercise the mandate of chairman of the board in his own name and not by means of his management company.

Subsequently, the manager proposed to give up the salary and director fees, which he would receive as chairman of the board, to his management company.

In a second case, a private individual, who also worked with his own management company, was also appointed as chairman of the board of a quoted company. On the basis of the corporate governance policy, the quoted company did not accept that the management company would be appointed as chairman of the board and the director agreement was to be signed directly between the individual and the quoted company.

In order to nevertheless channel the remunerations to the management company, the manager wanted to enter into an agreement with the management company in order to form a so-called ‘silent commercial company’. In such a silent commercial company, there is an active shareholder on the one hand, who performs professional duties and a passive shareholder on the other hand, who only contributes to the capital of the silent commercial company.

The manager wanted to contribute his professional activity to the new entity as a private person and his management company would then contribute existing know how. Subsequently the manager intended to give up the remuneration, received from the quoted company to the silent commercial company.

The ruling committee did not accept any of the two fore mentioned scenarios and did not deliver a positive ruling. The committee is of the opinion that the structures would bypass the corporate governance policy of the quoted company and would also not be in line with rules of Belgian law. Furthermore, the committee is of the opinion that one of the base conditions for exemption (of tax on behalf of the manager) is not met because it is not proven that giving up the director income is directly related to obtaining and keeping the director mandate with the quoted company.

Jan Lambrechts, Ichiban Consult