Social security: extended interpretation of ‘salary’
Only recently, the Belgian authorities have amended their interpretation of the definition of ‘salary’ for social security purposes (Administrative instruction Nr. 2018/03). This new interpretation – not necessarily compliant with the letter of the law – is obviously another attempt of the Belgian authorities to extend their grasp on employee remuneration in order to increase public revenue.
Belgian law describes ‘salary’ as (i) any cash benefit or benefit in kind that is capable of being valued in cash (ii) to which the employee is entitled, (iii) that is granted in the context of the employment relationship, and (iv) which is directly or indirectly borne by the employer. It includes any benefit to which the employee is entitled at the expense of his employer. This is rather straightforward for benefits that are provided directly by the employer. However, this is much more difficult to determine for those that are indirectly borne by an employer who employs staff in Belgium.
This is, for example, the case for benefits granted by a third party of which the cost is then recharged to the legal employer, as mentioned in the employment contract. This can be an independent third party, such as a client, supplier or independent fund, but can also be another entity of a Belgian or international group of companies to which the employer is affiliated. With this new ‘salary’ concept, several benefits will become subject to Belgian social security, which was not necessarily the case in the past.
The new definition applies to any payment in cash or any other benefit granted, but we mainly think of stock options (outside the scope of the Law of 26 March 1999) or other types of share-based remuneration. Before, if the specific tax regime laid down in the Law of 1999 applied and provided the options are not ‘in the money’ and no ‘certain benefit’ was granted, no Belgian social security was due when a stock option plan was rolled-out by a foreign parent company and the local employer was not involved in the process.
This will now change for those multinational companies employing staff under Belgian social security, as a result of the extended interpretation. Employer social security currently amounts to 25% and employee social security to 13.07%.
Income tax: reporting & withholding requirement
Several weeks ago, the Belgian government approved the first draft of a new set of fiscal, anti-fraud, financial and miscellaneous provisions. The preliminary draft contains a mix of provisions, including an important number of tax provisions. Quite a few of these are worth looking into, but we will only focus on the ones relevant in the context of employee remuneration paid by affiliated entities abroad.
While there is a specific reporting requirement for stock options granted under the Law of 26 March 1999 by foreign companies to Belgian employees; in general, most share-based types of remuneration offered by companies located outside Belgium to employees of affiliated Belgian entities, often escape reporting and withholding tax. As a result, there is no guarantee that such income is properly reported in a Belgian tax return by the beneficiaries and that any Belgian income tax due is properly paid.
This was recently demonstrated by the different tax audits that have been carried out by the special tax inspection (ISI/BBI) with various multinational companies in Belgium.
The new measure now targets the situation in which an employee receives salary or other benefits in kind, not from his employer but from an affiliated company abroad, and the local employer is not involved in the process. We can again think of stock options (outside the scope of the Law of 26 March 1999), but also of other types of share-based remuneration such as restricted stock units (RSUs), performance stock units (PSUs) or free or discounted shares.
By introducing a legal fiction, the Belgian employer will henceforth be deemed to have granted the benefits himself in those circumstances, as a result of which he will be required to withhold payroll tax and to comply with the related reporting requirement. This legal fiction will apply to any benefits granted as from income year 2019 (tax year 2020).
By way of a transitional arrangement, the reporting requirement and the obligation to draw up summary statements would already be introduced as from income year 2018 (tax year 2019).
While most of these share-based benefits are normally only taxable upon vesting/exercise, it is still unclear how the intended changes will actually be implemented and what the tax impact will be for the employee. We are currently awaiting further details as the legal text is being drafted, which is expected normally by the end of this year.