Individual or legal entity
You should not necessarily be a high-earning multinational executive operating in different countries before triggering a cross-border tax issue. When you are the sole owner and director of a foreign company, living and/or working in Belgium, you have probably asked yourself at some point where taxes are due on your earnings.
Belgian Company Law states that a director cannot have an employment relationship with the company they manage. In other words, a director in Belgium can only exercise their mandate as a self-employed individual. Not every country shares the same point of view. In other countries, directors are not self-employed. If they are paid by their company, it is often in the form of an employee’s salary. This is not only relevant for income tax, but also for social security purposes.
Directors can be both private individuals as well as legal entities. If a legal entity is appointed director, it needs to appoint a private individual at the same time who will represent the ‘director-legal entity’ in the managed company. This one is called a ‘permanent representative’. The latter carries out the mandate in the name of, and on behalf of, the legal entity.
Double tax risk
Irrespective whether you are exercising your mandate as an individual or via a company, you are typically obliged to pay income tax in the country where you earn an income. However, as a Belgian tax resident your ultimate tax filing responsibility is with Belgium. This is where the double taxation agreement (DTA) becomes relevant. The DTA will prevent double taxation by ultimately allowing only one country to tax your director salary and allowing you a tax exemption (or a tax credit) in the other.
The general rule for management fees is set out in Article 16 of most DTAs. Directors’ fees and other similar payments derived by a Belgian tax resident in their capacity as a member of the board of directors (or a similar organ) of a company, which is tax resident of another country, may be taxed in that other country. For example, if you live in Belgium but manage a UK company, the fees remain normally taxable in the UK. Belgium should exempt these.
Since it is not always easy to determine where exactly the activities of a director or manager are carried out, the basic principle is that they are exercised in the country where the company is resident. The right to tax the management fees are consequently assigned to that country.
It often happens that a member of the board of directors or supervisory board, also carries out other activities for the same company, for example, in the capacity of a person responsible for the day-to-day management, employee, adviser, consultant, etc. This is, for example, often the case for a CEO, CFO, COO or other top position within the company.
Article 16 does include fees paid for ‘day-to-day functions of a managerial or technical, commercial or financial nature’. However, these services are normally taxable in accordance with Article 15 DTA (employment article), as if such payment was salary derived by an employee in respect of employment and whereby any reference to the ‘employer’ is a reference to the company. The taxing rules for employment income are far more complex than those for board fees.
For Article 16, the DTA makes no distinction between directors-private individuals and directors-legal entities. The concept of a ‘person’ as included in Article 3 DTA, includes both private individuals and companies. However, if management services are provided by a company, the question is whether Article 16 DTA can also be used, or a different article of the tax treaty would apply.
The Belgian Ruling Commission was asked in 2021 to confirm which article of the DTA with Luxemburg applies to the fees that a Luxembourg company receives for its management services on behalf of a Belgian company in which it was appointed director. The Commission stated that Article 16 does not apply to fees for daily management services provided by a company (Ruling Nr. 2021.0511, 24 August 2021).
Since Article 15 DTA refers to ‘employment exercised’ and ‘physical presence’, it cannot apply to the management services performed by a director-legal entity either. Consequently, the right to tax this type of fees paid to a director-legal entity, needs to be determined on the basis of the treaty rules regarding profits (Article 7 DTA) instead.
In view of this, the Luxembourg company can only be considered taxable in Belgium on the management fees, if the payments can be allocated to a permanent establishment (PE) of the company in Belgium. Briefly, a PE is an international tax concept, being a fixed place of business in another country, resulting in an income tax liability in that jurisdiction.
In the present case, the Luxembourg company was indeed considered to create a PE in Belgium, as it frequently used a ‘rented premises and meeting rooms’ in Belgium for ‘its management services’. The board meetings of the Belgian company took place in designated and properly equipped meeting rooms. The directors’ meetings were organized on a regular basis in these premises. The latter also housed the offices where the company’s books and administration were kept.
The Luxembourg company issued invoices for its management fees at arm’s length, whereby a balanced distribution was made in view of the services provided by the legal entity both in Luxembourg and in Belgium. Only the latter would be subject to the Belgian Non-Resident Corporate Income Tax to the extent the service fees can be allocated to the PE in Belgium. In that scenario it would also require the Luxembourg company to do proper bookkeeping and accounting in Belgium.
Board member fees
Fees that are not paid for daily management, but to the directors in their capacity as a member of the board of directors (or a similar organ) of a company, are always taxable in the country where the managed company is resident and this regardless of whether there is a PE. This rule applies to directors-private individuals as well as to directors-legal entities. This has been explicitly confirmed by the Belgian tax authorities about 20 years ago (Nr. 5, AFZ/Intern.IB/2002-0026, 17 December 2002).