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

Also companies are required to follow the procedure
Conflicts of interest in the new Companies and Associations Code
The new Companies and Associations Code (CAC) entered into force on 1 May 2019. The CAC provides for broader and stricter regulations concerning conflicts of interest that may arise within an organisation. Broadening the scope of regulation means that the directors of cooperative companies, non-profit organisations (ASBL/VZW) and foundations&n
Important things you have to know
Some do’s and don’ts when making a bank donation
The bank donation is still a very popular way of donating money by bank transfer. This is not surprising: if it is carried out according to the rules of the game, the bank donation is a valid donation, without (too much) red tape and without incurring gift tax. However, there are a few rules that threaten to spoil the game if they are not followed correctly. Hence some tips that you should keep in
The further course of the relationship between the UK, the EU and the EEA
What impact will Brexit have on your corporate income tax?
For the time being, the United Kingdom (UK) is still part of the European Union (EU) and the European Economic Area (EEA). The UK has since been given until 31 October 2019 at the latest to implement Brexit. This means that cross-border transactions with the UK continue to fall within the scope of EU directives. However, after Brexit, the UK will no longer be able to rely on these directives. This
Less strict circular for catering sector
New circular regarding the VAT rate for restaurant and catering services
On 1 January 2010, the VAT rate for restaurant and catering services was reduced to 12%. This rate only applies to food. Drinks (including non-alcoholic beverages and coffee and tea) are still subject to the standard VAT rate of 21%. On 23 December 2009, the administration published an explanatory note in which it detailed how an overall price for a menu (including drinks) needed to
From now on, also 'high' fixed cost deductions for self-employed persons
Personal income tax return form AY 2019: several new features explained
From now on, also 'high' fixed cost deductions for self-employed and other changes  The new personal income tax return form for assessment year 2019 was published on 7 April, the starting shot for the annual tax return race. For the Flemish tax return, "only" 6 codes have been added, and for the Walloon and Brussels tax returns, "only"
Does the new definition of a company have any consequences for your organisation?
Broader requirements for registration with the CBE - clarification for unincorporated companies
In a previous article, we explained that the introduction of a definition of 'company' in the new Companies and Associations Code (CAC) also affects the registration with the CBE (Crossroads Bank for Enterprises). In this article, we will discuss in more detail the registration obligation for unincorporated companies.  Consequences of the broader definition of a company  With the new
Noticeable impact on tax matters
Impact of Brexit on registration and inheritance tax
The tension in the United Kingdom is palpable. In the meantime, the initial date of Brexit, 29 March 2019, has been delayed. Depending on whether an agreement will be reached or not on 29 March, UK's departure date will be moved to 12 April 2019 in case of a hard Brexit (no deal) and to 22 May 2019 in case of a soft Brexit (deal). It is clear that Brexit will have an impact on tax matters, bo
An easing-up for most SMEs
New interest deduction restriction mostly offers opportunities
As part of the reforms to corporation tax in late 2017, a new interest deduction restriction was also introduced. This is part of the second phase of the reform, meaning that it applies in principle to financial years starting on or after 1 January 2019 (assessment year 2020). The new interest deduction restriction was introduced in the transposition of the European Anti-Tax Avoidance Directive (A
Some important dates highlighted
The new Companies and Associations Code
The new company and association law had already been announced for some time, and it was approved by the Chamber on 28 February 2019. Below we give a brief explanation of some of the important dates associated with the entry into force of this new legislation.   Introduction of the new legislation  The law introducing the Companies' Code enters into force on 1 May 2019 and repea
The new rules for VAT processing of vouchers
The wonderful world of VAT and vouchers
Vouchers are a very popular marketing tool. There are various types of vouchers: discount vouchers issued by a manufacturer, redeemable at any sales outlet in Belgium, discount coupons issued free of charge by retailers, vouchers where you can get a newly launched article free of charge, gift vouchers that can be redeemed for a whole range of products or services, electronic vouchers, etc. Are yo

Subscribe to our newsletter