The Summer Agreement, partially translated into the Corporation Tax Reform Act of 25 December 2017 (published in the Belgian Official Gazette of 29 December 2017) introduces a reduced corporation tax rate that falls to 25% by tax year 2021. Under certain conditions, a small company can even benefit from a reduced rate of 20% on its first tranche of € 100,000 of taxable revenue. However, the reduction in the corporation tax rate also involves a number of compensatory measures, including a tax penalty for companies that do not meet a new minimum remuneration requirement. Below, we take a look at the requirement of the minimum remuneration that companies are now obliged to pay out.
In order to discourage the setting up of companies for purely tax reasons and to prevent companies that generate sufficient profit from compensating the natural persons active within the company solely through dividends, art. 219d of the Income Tax Act ("WIB") imposes minimum management remuneration provisions. The minimum remuneration is € 45,000 or if the taxable result is less, compensation that is at least equal to the taxable result of the company. This minimum remuneration must be awarded to at least one of its business managers (being natural persons).
For affiliated companies of which at least half of the business managers are the same persons in each of these companies, the aggregate of the remuneration paid by these companies to one of the same persons may be taken into account in order to determine the amount of the remuneration. In that case, the total amount of the minimum remuneration is raised to € 75,000.
The sanction for non-compliance is a separate assessment of 5% (tax years 2019 and 2020) or 10% (from tax year 2021) on the difference between the minimum remuneration and the highest remuneration awarded by the company to one of its business managers.
In favour of or to the detriment of the taxpayer?
The question can be asked whether the new rules are ultimately in favour of or to the detriment of the taxpayer. The answer to that question will depend on the concrete set of facts and whether the remuneration of the business manager is increased or not to avoid the penalty for the shortage of minimum remuneration. In order to answer this question correctly, account must be taken of, inter alia:
- the level of the current remuneration (and the rate scale in which it is taxed),
- the social security contributions,
- the municipal tax,
- whether the company is subject to the reduced, rising rate,
- whether or not the business manager receives only professional income,
- whether the business manager is married or not (applying the marriage quotient),
In short, a whole series of factors that can each take effect.
To the extent that the profits of the company exceed € 45,000 and the existing remuneration (lower than € 45,000) is not increased to avoid the sanction, it is certain that the total bill will often be more disadvantageous for the tax years 2019 and 2020. From tax year 2021 onwards, the scheme may become more advantageous mainly due to the further fall in the rate of corporation tax.
To the extent that the remuneration is raised to the minimum of € 45,000 or already amounts to at least € 45,000, different hypotheses show that the new scheme is often generally more profitable overall. The decrease in the corporation tax due generally compensates for the additional costs resulting from the increase of the remuneration. The company can therefore indeed compensate the tax disadvantage for the tax years 2019 and 2020 by increasing the remuneration of the business manager to the required statutory minimum.
We would also like to point out that this separate assessment will not be applicable for small companies during the first four financial years from the moment they are set up if the business manager is not remunerated sufficiently.
This is a measure that goes beyond merely providing a condition for enjoying the reduced rate for small companies. As mentioned above, this sanction applies to all companies (both small and others) that do not or do not adequately compensate their business managers.