by Stephanie Vanmarcke
Tax authorities are tracking down income paid to directors for international roles
As a director of a foreign company, your mandate may include two separate functions, for which you receive two salaries. Specifically, you could be a member of the Board of Directors and at the same time have responsibility for day-to-day management. In today’s expanding “global village”, where international roles are increasingly common, it can be a challenge to identify exactly what income should be taxed where. Perhaps just in the foreign country? A nice idea, but sadly too simple...
Board of Directors
The remuneration received by a director for their role on the Board of Directors is taxed in the country in which the company is located, in accordance with the OECD Model Tax Convention. The director does not have to be physically present in that country. Accordingly, the state where the director resides cannot levy any taxes. The state of residence can achieve this either by exempting the remuneration or by granting credit for the foreign tax.
Day-to-day tasks
The double tax agreements that Belgium has adopted generally include a limiting clause specifying that the income received by a director for their day-to-day tasks falls under a separate tax regime. In practice, this means that the income is taxed in the country where the tasks are carried out.
However, there is an exception. The director’s state of residence may tax the director’s salary if all three of the following criteria are met:
- The director has worked for fewer than 183 days in the source country
- The salary is not paid by an employer in the source country
- The salary is not paid at the expense of a permanent establishment in the source country
This means in practice that the Belgian tax authorities only have to issue an exemption if the taxpayer can demonstrate that they were really working in the foreign country.
More stringent checking for salary splits
Taxpayers often use salary splits to avoid the high taxation in Belgium. However, the split factors do not always honestly reflect the taxpayer’s true physical location, such that income may be unfairly exempted from the Belgian taxation. In other words during the division allocation, too much income is allocated away from Belgium – with the intention of reducing the taxpayer’s tax burden.
The Belgian tax authorities are aware of this technique. As a result, taxpayers are more frequently being asked to provide clarifications to establish the true physical location where the director is employed. It is therefore important to ensure that remuneration for day-to-day tasks is organised appropriately and in line with the taxpayer’s true physical location.
Stephanie Vanmarcke
Team Manager International | Certified Tax Advisor stephanie.vanmarcke@vdl.be
Disclaimer
In our opinions, we rely on current legislation, interpretations and legal doctrine. This does not prevent the administration from disputing them or from changing existing interpretations.
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