Change to the fiscal situation regarding directors’ remuneration

We have written about this possible change before in this previous article.

Most tax treaties determine that directors’ remuneration is taxed in the country where the company is established. The country of residence must then offer relief from double taxation on this income. Most tax treaties include the settlement method as a prevention method. However, the State Secretary of Finance approved a decree in 2008 that also allowed the application of the exemption method to directors’ remuneration. Accordingly, the director's remuneration may not be taxed more favourably than normal employment pay in the country of taxation.

The settlement method means that the country of residence provides relief from double taxation for the tax actually paid in the other country. This avoidance technique may be disadvantageous if the tax rate in the country of residence is higher than in the other country. The exemption method is often more advantageous in this situation.

When the exemption method is applied, the double taxation relief in the country of residence is calculated in proportion to the foreign income and the total income.

As the approval will be withdrawn as of 1 January 2023, the settlement method will then be applicable to directors' remuneration. If you receive directors' remuneration from a foreign company, this may result in a higher tax burden. It is therefore a good idea to reassess your situation in the light of this change, and to consider what options are available to prevent and/or mitigate any adverse consequences.