Introduction
Belgium and the Netherlands signed a new double tax treaty on June 21, 2023, with the treaty expected to take effect on January 1, 2025. The treaty introduces significant changes particularly affecting the taxation of company director’s remuneration.
Under the current treaty, the income of a director (or a similar position) is taxed in the country where the company is located. This means that a Belgian director of a Dutch BV currently pays income tax in the Netherlands, regardless of where they physically perform the work. The reason for this is that it can be a real challenge to find a territorial point of connection for cross-border director activities. This not only concerns director’s remuneration for a formal mandate in the company but also includes compensation for leading roles such as daily management, but always in a self-employed capacity.
Overview of Changes
- Director’s Remuneration: According to the new treaty, remuneration for roles such as board members or supervisory board members will be taxed exclusively in the country where the company is headquartered.
- Additional Compensation: Remuneration for roles involving daily management tasks or consulting will now be taxed in the country where the work is physically carried out. This stresses the need for directors to be meticulous in tracking where duties are performed to be able to comply with tax obligations. Any additional activities, such as the tasks of daily management, will be taxed in the future in accordance with Article 14 of the new treaty; the regular employment article.
Practical Example
Consider James, a Dutch resident and director of a Belgian BV, who earns €50,000 as a director’s fee and an additional €120,000 for daily management tasks. Under the new treaty:
- €50,000 for his directorship will be taxed in Belgium.
- €30,000 of his daily management compensation (representing the portion of work performed in the Netherlands) will be taxed in the Netherlands, for working 25% of his time from home.
- €90,000 of his daily management compensation (representing the portion of work performed in Belgium) will be taxed in Belgium, for working 75% of his time at the office.
For the director fee and the daily management compensation for Belgium, James will be required to submit a Non-Resident Tax Return in Belgium every year. The tax paid in Belgium can then be credited in the Dutch personal income tax return (following the so-called ‘credit method’).
Tax Filing Implications
As of next year, directors living in the Netherlands and working in Belgium (or vice versa) need to clearly distinguish between their director’s fees and other compensatory forms, as misclassification could lead to tax compliance issues. This stresses the importance of updating compensation agreements before January 2025 to accurately reflect these new classifications. This can result in a situation where a director owes taxes in both countries, depending on the nature and location of the work performed.
It is indeed possible that compensations, which are currently only taxed in the Netherlands or only in Belgium, may in the future be taxed (partially) in the other country as well. This is also referred to as a salary split or payroll split. As a result, the director must pay taxes in different countries for these additional activities. In practice, this could result in a tax advantage because the lowest tax bracket can be utilized in two (or even more) countries.
Social Security
The new tax treaty approach will create no changes in terms of social security. This still follows the reference rules of EU Regulation 883/04. From a Belgian perspective, company directors are typically considered to be self-employed, while this is not always the case in other countries, like the Netherlands.
Social security contributions are normally paid in the country where the work is physically performed. For directors of companies, the rules can be more complex. Generally, contributions might be due in the country where the company is based, especially if the director’s activities are tied closely to the governance of the company and less to where the physical work takes place.
Where social security will be due therefore depends on the factual circumstances of each case and where a substantial part of the work is performed.
Conclusion
The new treaty offers a more segmented approach to taxation, requiring careful consideration and planning from both companies and directors, basically making it a lot more complicated to pay taxes in the correct country and making sure you remain compliant.
As a result, under the new treaty, classification issues for taxation purposes will more often arise, which will also make it more difficult to determine the correct social security treatment.
Companies and individual directors are advised to review and update their compensation structures to ensure compliance and optimal tax handling under the new treaty conditions.