Belgian Tax and Social Security Changes That May Impact Your Incentive Schemes

Belgian tax and social security changes that may impact your incentive schemes

We are reaching out to you with regard to an update in the fields of Belgian social Axel Haelterman security and tax law which is particularly relevant for groups where Belgian employees Partner, Tax participate in stock option or share plans or other type of benefits plans which are T +32 478 84 40 28 organised at group level. Indeed, recent administrative positions and announced E [email protected] legislative changes seem to significantly extend the scope of Belgian social security and Nikolaas Van Robbroeck payroll tax withholding obligations with respect to such benefits. Counsel, Tax T +32 473 83 62 89 Please find below an overview of these developments: E nikolaas.vanrobbroeck @freshfields.com

Satya Staes Polet New administrative interpretation widens scope of social Counsel, People and Reward T +32 477 96 11 29 security obligations on benefits granted by other group E [email protected] companies Bruno Aguirre Associate, People and Reward The Belgian Social Security Office (the NSSO) has recently amended its administrative T +32 498 92 11 61 instructions, on its interpretation of the definition of remuneration (which is based on E [email protected] the Belgian Act of 12 April 1965 concerning the Protection of Wages (the Remuneration Act)).

Current situation According to the definition of ‘remuneration’ (which is used to determine the base calculation of social security contributions), benefits are considered as remuneration if they are (i) benefits in monies or valuable in monies, (ii) to which the employee is entitled (iii) borne by the employer (ten laste van de werkgever / à charge de l’employeur) and (iv) granted as a result of an employee’s employment.

On the basis of the NSSO’s administrative instructions before their modification, employee benefits were not considered as remuneration (and, hence, not subject to social security contributions), if they were not directly or indirectly borne by the employing entity (i.e., the cost of the benefit was not borne or recharged to the employing entity, the employing entity had no role in administration of the benefit plan, etc.).

For example, awards granted to the employees of a Belgian employing entity under a share-based incentive scheme organised at the level of a (foreign) holding company, in which the Belgian employing entity did not intervene in any way (i.e., no costs (re)charged to the employing entity and the latter does not take any responsibility in the administration of the benefit plan) were not subject to social security contributions.

Freshfields Bruckhaus Deringer LLP Belgian tax and social security changes that may impact your incentive schemes September 2018 1 New administrative instructions of the NSSO way to avoid the above uncertainty is to favour the use of qualified stock options under the Stock Option Law of Under its modified administrative instructions, the NSSO 1999, which are explicitly exempt from social security now takes the view that a benefit will be considered to be contributions. indirectly borne by the employer if the grant of the benefit is the consequence of the work performed within the framework of the employment contract entered into with New payroll withholding tax and the employing entity, or is linked to the role carried out by reporting obligation for benefits the employee with his/her employer. granted by foreign group companies This amended position may have important financial consequences, as the NSSO might now also claim As part of the “summer agreement” of last July, the Belgian employee’s and employer’s social security contributions on government decided to introduce a measure which needs to benefits that were until now granted free from such ensure a correct taxation of benefits granted by foreign contributions. group companies to Belgian employees and directors.

Comments Current situation We have two main comments on theis modified Within international groups, Belgian residents who are interpretation. employed by Belgian group companies may participate in an international stock option plan or other type of share 1. This interpretation is not in line with the definition of plan (free share awards, discounted stock purchase plan, remuneration included in the Remuneration Act and the etc.) organised by a foreign parent company. If the Belgian most recent case law of the Belgian Supreme Court on group company does not intervene in the grant or this issue: administration of the plan, it will not be required to deduct payroll withholding tax with respect to the benefit in kind - the Remuneration Act provides that in order to be derived by its employees from such plan. The Belgian group considered as remuneration, the benefit has to be company/employer will also not be required to report such granted as a result of an employee’s employment and benefit to the Belgian tax administration (except in the borne by the employer (ten laste van de werkgever / à case of stock options within the scope of the Law of 26 charge de l’employeur); under the modified March 1999). The Belgian tax administration is thus not administrative instructions, the first condition seems to automatically informed of the benefit. Such benefit is absorb the second one, which does not seem to be in line however taxable for the Belgian employees, who are with the aim of the legislator; and required to report it in their annual personal income tax - the Belgian Supreme Court applies a broad return. interpretation of the requirement that the benefit must be borne by the employer, but still requires that for that New payroll withholding tax and reporting requirement to be met (i) the benefit is awarded by the obligation employer, (ii) the employee can assert a right vis-à-vis his/her employer, and (iii) such right is based on the Under the new rule, any benefit which Belgian employees employee’s employment; under the modified receive from foreign group companies, as a result of or at administrative instructions, the NSSO seems to the occasion of the professional activity exercised by the disregard the first two cumulative conditions. employee for the benefit of the Belgian group company/ employer, will be deemed to have been granted by that Subject to further information from the NSSO on its Belgian group company/employer. Through this legal amended administrative instructions, we therefore fiction, the Belgian employer will be required to deduct believe that there are arguments to challenge the payroll withholding tax from the employee’s Belgian NSSO’s new position. salary, and to report the benefit on salary slips. In order for this new withholding tax and reporting 2. It is unclear whether the amended interpretation only obligation to apply, the grantor of the benefit must be a applies to future benefits, or whether benefits that were “related company” of the Belgian employer. This includes a already granted, are also impacted. foreign company which exercises (directly or indirectly) control over the Belgian employer and a foreign company We will follow up on any further information from the which the Belgian employer (directly or indirectly) NSSO on this subject. In the meantime, it is important controls. “Control” refers to the power, de facto or de iure, to take this new interpretation into consideration for to exercise a decisive influence to appoint the majority of the potential cost assessment of any awards that are the directors or on the orientation of the management of granted to employees by other entities than the the company and is presumed to exist in case a company employing entity, whether in Belgium or abroad. One holds the majority of the voting rights attached to the

Freshfields Bruckhaus Deringer LLP Belgian tax and social security changes that may impact your incentive schemes September 2018 2 shares of another company.

The new withholding tax obligation would not be limited to share-based compensation but would also apply to e.g. long term cash plans or any other type of remuneration received by Belgian employees from a foreign group company (provided that the benefit is granted as a result of, or at the occasion of, the professional activity exercised by the Belgian employee for the benefit of the Belgian group company/employer). It would apply to benefits granted to employees, directors and self-employed senior managers, if they are Belgian tax residents or non-residents subject to taxation in Belgium. It would also apply where Belgian employees are employed by the Belgian permanent establishment of a non-resident company.

Timing of new obligations We understand that these rules are agreed at government level. They still need to be approved by the Belgian parliament before they can enter into force.

Once approved, the new payroll withholding tax and reporting obligation is expected to fully apply as of 1 January 2019. However, it is our understanding that the obligation to report the benefit on salary slips, would already apply to any benefit granted during 2018. Failure to fulfil the latter reporting obligation with respect to 2018 income would however not be penalized provided that the company can demonstrate that the income has been declared in a personal income tax return in Belgium or abroad.

Comments Under the new rules, Belgian group companies/employers will need to retain payroll withholding tax from their Belgian employees’ salary if these employees (or self- employed managers or directors) receive any type of taxable remuneration from a foreign group company, even if the Belgian group company did not in any way intervene in the grant. However, in some cases, exactly due to the absence of intervention by the Belgian employer, the latter may not know and, for HR confidentiality reasons, is sometimes not intended to know the precise amount of taxable benefit granted to each of its employees, managers or directors. Groups may therefore need to take necessary steps in order to be able to comply with these new withholding and reporting obligations.

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