Taxation of referral premiums for new staff

The search for good personnel is like a calvary for many companies. A number of them reward a tip for hiring a new employee with a referral premium or bonus. The Tax Ruling Commission recently shed its light on the tax system of such premium.

The facts

X is a service company. Since it cannot find suitable personnel - like many other companies in the sector - it decides to pay a referral bonus to anyone who introduces a suitable candidate-employee. The premium can therefore be awarded to the own employees as well as to third parties. This initiative is made public through different channels, including its own website, social media, etc. The amount of the premium depends on the profile of the candidate presented, and more specifically on his/her relevant work experience.

Conditions

In order to receive the premium, a number of conditions must be met:
• only new candidates can be proposed. Ex-employees, trainees, job students, ... do not qualify;
• the candidate must be introduced through a specific procedure;
• all vacant positions published on X's website are eligible for the referral bonus;
• the introducer will be informed of the decision after the recruitment process;
• the candidate must remain employed for at least 6 months. After those 6 months, the referral premium will be paid.
A person can qualify for a referral bonus several times a year.

Own staff or third parties

As mentioned above, both the own employees as other persons from outside the company are eligible for the referral bonus.
Own personnel is any employee who is employed by X at the time of the application of the candidate. HR employees and the partners and directors of X are excluded.
Other persons from outside the company include all other persons who are not employed by X, with the exception of external HR companies, temporary employment agencies, trade union organisations, etc.

How is the referral premium taxed for employees?

The law defines remuneration and wages as all remuneration that is received by the employee for the work performed for an employer. Based on this definition, gifts or discounts that an employer gives to employees are primarily a form of taxable income; a referral premium could therefore also qualify under this definition.

But, says the ruling commission, the tax authorities do allow taxpayers to demonstrate that an advantage is granted for another reason than employment, or that the advantage could just as well have been obtained if the professional activity had not been performed. And that is exactly what happens here: the referral bonus is not only open to the company’s own staff, but also to third parties. For that reason, the payment of the referral premium to the company's own staff should not be regarded as salary. The distribution must be taxed in the same way as for third parties who receive a referral premium.

How is the referral premium taxed at third parties?

While the ruling commission initially appears reasonably tolerant for the taxation of the referral premium for its own staff, it is fairly strict with regard to the referral premium for third parties. According to the commission, the referral premium should be regarded as a random service. Both for third parties and for own staff. This means that the premium is taxable as miscellaneous income, at a tax rate of 33%.

You may deduct your costs, but there is no lump sum: only the actual costs can be deducted.
In addition, the ruling commission believes that this can only be a “random performance” if the referral bonus is not awarded more than twice to the same person. You should see this last condition as the result of a negotiation. It is certainly not a rule that is written in the law.

Incidentally, the question is what happens if one person introduces more than 2 people: for example, a new employee who persuades a former colleague to follow him to the new employer. What kind of income will it be then: salary? Or something else?

Companies that want to grant a referral bonus can in any case consider also rewarding outsiders for new employees. In any case, this benefits its own staff, if only to a limited extent.