Rules for remuneration of company directors

Reclassification of property income as remuneration

A common situation is that a director rents his property to the company in which he is a director. From a personal income tax perspective, this is not a problem, as both the property income and the remuneration are taxed progressively. The challenge lies in the area of social security, where only remunerations are considered for calculating social contributions.

To prevent directors from evading social contributions by swapping salary for higher rental income, an anti-avoidance measure was introduced. This measure limits rental income to 5/3 of the revalued cadastral income. The part above this limit is fiscally considered as remuneration, and therefore social contributions are due.

Remuneration theory

The remuneration theory arises from situations where a company provides (real estate) assets to its director for free or at a limited fee. In this case, the company can deduct the actual costs, while the director's tax liability is often valued at a lower lump-sum benefit in kind.

This discrepancy between deductibility in corporate tax and (limited) taxability in personal tax is of concern to the tax authorities, that have developed several countermeasures. These include the finality or intentionality condition, which questions whether the expenses were incurred by the company with the intention of generating or retaining taxable income.

However, the remuneration theory argues that actual services were provided by the director. The manner of compensation (in cash or in kind) should not affect the assessment of deductibility.

The evolution in case law on this subject is encouraging. However, several considerations must be taken into account. For example, it is advisable to provide for formal approval of the remuneration policy by the general meeting, followed by an explicit mention in the minutes.

In addition, the relationship between the performance of the company's directors and the development of the company's turnover should be considered. An increase in turnover suggests that the director's performances are indeed generating taxable income. Finally, we note that the discrepancy between deductibility and taxability is not in itself a reason to deny the deduction, as it is merely the consequence of the strict application of the law, which provides for lump-sum payments of all kinds.

Tax status of the permanent representative of a director-legal entity

For a long time, there was uncertainty about the tax status of an individual acting as the permanent representative of a director-legal entity. However, in 2020, the Court of Cassation provided clarity. The Court ruled that the role of the permanent representative is 'similar' to that of a director and is therefore fiscally regarded as a company director.

This ruling has broad tax implications, meaning the permanent representative of a director-legal entity is subject to:

• Reclassification of rental income as company director's remuneration;

• Reclassification of (deductible) interest as (non-deductible) dividend in case of excessive interest or when the current account exceeds the sum of taxed reserves and paid-up capital;

• The attraction principle (everything the director receives is considered as director's remuneration);

• Taxable benefits in kind;

• Certain form-filing obligations on the part of the managed company.