Bonuses: a last-resort method of cutting your company’s tax bill

At the end of the financial year, it sometimes turns out that a company has paid too little tax in advance and is going to get hit with a hefty tax bill. In principle, there’s no getting out of it, if all possibilities for optimisation have already been exhausted. But you should never think it’s too late to escape that enormous tax bill. The awarding of a bonus can be invoked as a last resort to mitigate the tax burden on your company.

What is a bonus?

A bonus, also known as a tantième, is a share of the profits of a company that is awarded at the annual general meeting to the directors or business manager(s). It doesn’t matter whether or not they are shareholders of the company.

In this respect a bonus is similar to a dividend, since that too is about distributing the profits in a manner decided upon by the annual general meeting. But that’s where the similarity ends.

When a dividend is allocated, all shareholders of the company get an equal piece of the pie in proportion to their shareholdings.

The awarding of a bonus is different. For example, the annual general meeting can award a bonus to one director and not the others. The amounts can also differ if several members of the Board of Directors are separately awarded bonuses.

The basic philosophy of a bonus is that it’s granted as a reward for services performed.

A bonus paid to a business manager or director is considered to be an additional salary, which is a deductible expense for the company. A dividend on the other hand is considered to be a return on capital, so it’s not a deductible expense for the company. For the recipient, a dividend must in principle be reported in the personal income tax return as income from movable property, even after withholding tax has been deducted[1].

The time for deduction as an expense and the taxability for the director or business manager

It’s useful to know that the bonus is regarded as a deductible expense for the paying company in the year to which it relates (and thus not the year in which it is awarded).

A bonus is only taxable for the director or business manager in the year in which it is awarded or made payable.

Example 1

Jane is the business manager of the company HARD@WORK BVBA. On 31 December 2011, the closing date of the financial year, the company made a profit of €50,000 before tax. On 1 May 2012 the annual general meeting was held and it was decided to award Jane a bonus of €15,000.

This means that for the 2011 financial year, the company will only pay tax on a profit of €35,000[2].

Jane will pay personal income tax on the bonus awarded to her in the 2013 assessment year (2012 income year).

Optimisation

If you already draw a salary from your company, the downside of such a bonus is that it will be added to your other remuneration as a director of the company. This often means that the bonus is taxed at the highest personal income tax rate. Three years later, you may also have to pay more social security contributions.

To counteract this, you could consider proportionately reducing your "normal" salary as a company director.

There is another option, whereby the bonus is made payable over several calendar years. A bonus is only taxable for you personally in the year in which it is awarded to you or is made payable[3].

It is very important that you expressly stipulate this in the minutes of the annual general meeting.

Example 2

The same details as in Example 1, but in the minutes of the annual general meeting it is specified that the bonus will be made payable as follows:

  • €5,000 on 1 June 2012
  • €5,000 on 2 January 2013
  • €5,000 on 10 February 2014

Jane will be taxed for the bonus awarded on 1 May 2012, for a total of €15,000, spread over the following years:

  • €5,000 in the 2012 income year
  • €5,000 in the 2013 income year
  • €5,000 in the 2014 income year

Despite the taxability being spread out over time, the full amount of the bonus will be deductible for HARD@WORK BVBA as an expense for the 2011 financial year.

There’s not much point in systematically replacing your salary with a bonus

A feature of the awarding of a bonus is that it allows you to defer the taxability of a portion of the profit of your company. So you could decide to stop paying yourself your "normal" monthly salary and instead award yourself a bonus at every annual general meeting. You’ll gain a year on the payment of taxes on part of your profits. This is perfectly possible in theory, but can sometimes have unexpected consequences.

For example, a monthly salary is still required if your company has taken out the following types of insurance in your favour:

  • Hospital insurance
  • IPC insurance
  • Income protection insurance

The level of your monthly remuneration is critical to the maximum insured amount if your company pays your IPC and/or income protection insurance.

Awarding a bonus can, in certain cases, be particularly useful in reducing the amount of company income tax to be paid. Especially if the results of your company fluctuate sharply from year to year, it can be a useful mechanism for creaming off the profits in the good years and reducing your remuneration in the lean years. But don’t lose sight of the fact that the bonus is considered to be additional remuneration for tax purposes, on which you have to pay personal income tax and social security contributions.

[1] Unless the 4% additional levy is deducted on top of the 21% withholding tax
[2] Disregarding disallowed expenses and certain tax deductions
[3] See Article 204.3 Income Tax Code 1992

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