Since the recent corporate tax reform, SMEs have been able to benefit from a reduced tax rate on their first €100,000 of income. This rate is 20.4% (including the additional crisis contribution of 2%) for tax year 2019 and will be lowered to 20% as from 1 January 2020. However, the reform not only introduced new rates but also revised the requirements that companies must meet in order to benefit from the reduced rates. One of these requirements pertains to the minimum remuneration of company directors. It should be recalled that this condition implies that a company must pay at least €45,000 per year to at least one of its directors. At first glance, this statutory requirement appears simple and practically identical to the legislation in force prior to the reform. However, it has already given rise to considerable discussion. We therefore propose to review the situation one year after the introduction of the new rules.
To whom should the remuneration be paid?
The law states that the remuneration is to be paid to a company director who must be a natural person. Remuneration granted to management companies is thus excluded. The initial text provided that the company had to grant remuneration to one of its directors, allowing an interpretation according to which a company without natural person directors was exempt from this requirement. The draft legislation was however amended and now clearly stipulates that the remuneration must be granted to a director.
As from when?
The obligation only arises four years after the date of incorporation of the company, i.e. the filing date of the company's instrument of incorporation with the registry of the business court. However, if the company is continuing an activity that it performed previously (for example, on a self-employed basis) the earlier period during which the activity was performed will be taken into account.
Which remuneration is relevant?
When a company director performs his or her directorship free of charge but also receives remuneration as an employee (of the same company), the salary so received is taken into account to calculate the director's minimum remuneration. However, salary paid to the director by an affiliated company will not be taken into account. This was confirmed by the finance minister to the House of Representative's finance committee in June and September of this year.
What happens in the event of insufficient income?
What happens when a company that wishes to benefit from the reduced tax rate pays its director less than €45,000? The law provides that, in this case, the company may still benefit from the 20.4% rate provided the remuneration granted to its director is equal to or greater than its taxable income. For example, a company with taxable income, before deduction of the director's fee, of €50,000 must allocate at least €25,000 of this amount to its director's remuneration if it wishes to benefit from the reduced tax rate. In general, a company with taxable income, before deduction of the director's fee, of less than €90,000 must allocate at least half this amount to its director's fee in order to satisfy the minimum remuneration requirement. The tax authorities detailed this calculation method in an administrative circular dated 22 October 2018.
What are the consequences in the event of insufficient remuneration?
The most obvious consequence is ineligibility for the favourable tax treatment. The company will thus be subject to tax at the ordinary rate (currently 29.58%). Moreover, the law introduces a separate contribution of 5% on the difference between the amount that should have been granted to the director and the amount that was effectively granted. In the case of affiliated companies at least half of whose directors are the same persons, the minimum remuneration they must jointly pay one of their directors will be capped at €75,000 (rather than €45,000 per company). It should be noted that the aforementioned sanction is applicable to all companies, not only SMEs. However, the contribution constitutes a deductible business expense for the company. It was initially proposed to raise the rate of the special contribution to 10% as from 1 January 2020 but this proposal was abandoned and ultimately not included in the Act of July 30 July 2018.
in collaboration with Aurélien Lenaerts
