Secret commissions: more strict application or not?
Certain expenditure can only be deducted as professional expenditure to the extend that they are justified by an individual statement and a summary statement. Non compliance with this justification obligation is severely sanctioned. A special taxation on secret commissions can be imposed. This special taxation amounts to 309%. A recent instruction of the tax authorities prescribed a more severe application, but the Minister of Finance reconsiders.
The legal principles
When your company wants to deduct the following costs as professional expenditure, it should issue individual and summary statements: (1) commissions, broker's commissions, fees, benefits in kind which are taxable income for the receiver, (2) salaries and pensions and (3) repayment of costs proper to the employer.
The idea is to easily identify and tax the receiver of the income. Therefore the non compliance with the obligation to issue the statements is severely sanctioned. The tax authorities will in such case impose a special taxation of secret commissions at 309%. This even occurs when you file the statements too late. When you don't file the statements in due time because of force majeure, the tax authorities take a compliant position. This tolerance only applies if the late filing is not voluntary or systematic and foreseen it is not related to tax avoidance. Furthermore the late filing should not prevent the tax authorities from taxing the receivers of the income nor make the taxation more difficult.
Administrative tolerance for non filing of statements
According to the law there is only one way to avoid the special taxation in case you didn't file the statements. Your company shows that the commissions, salaries, ... or benefits in kind where declared to the tax authorities by the receiver.
In spite of the clear legal provision, the tax authorities allowed 'corrections' in the past. These are particulary useful for non justified benefits in kind granted to directors. The following examples presume that your company (in which you are a shareholder) grant a benefit to you as director of your own company.
A first correction consist in reporting the amount of the benefit in kind as disallowed expenses in the company. As a consequence the benefit in kind is taxed in the hands of the company. This is no longer accepted by the tax authorities: you cannot choose yourself whether the benefit is taxed with the company or with you, being the receiver.
A second correction can be made through your current account as director. By entering the amount of the benefit as a receivable in your current account, the benefit is no longer a 'benefit'. This correction can only show the good faith of your company. It is however not the purpose to use this technique for companies systematically not complying with their obligation to file statements.
The administrative instruction versus the opinion of the Minister
A recent instruction of the tax authorities stated that a regularisation afterwards through one of the above 'corrections' is not possible. The Minister of Finance however reconsiders this stronger position, since a too rigid application of the special taxation may lead to unjust situations. In the future the taxation officers can still take the factual circumstances in consideration: the fact that the benefit can still be taxed in the personal income tax, the good faith of the company, the exceptional character of the negligence and finaly the relative importance with respect to other tax obligations.
A new additional instruction will be released to clarify the new position. This new instruction will have retroactive effect until December 2010, the date of the initial 'severe' instruction. In pending disputes with the tax authorities the new instruction can also be invoked.
How the principles of good faith will be applied in practise remains currently unclear. To avoid all problems you better make sure in the future that your company files all the necessary statements for all salaries and benefits.
Nota bene: the special taxation is professional expenditure
The severeness of the sanction is put into perspective because the special taxation itself is professional expenditure. A simple example will clarify this. Imagine that your company grants you a benefit in kind for 100€. The expense is not justified by an individual statement. Result: the tax authorities impose a special taxation of 309€ (100€ x 309%). Your company can now deduct 409€ (100€ of the benefit in kind + 309€ special taxation). For your company this implies a tax advantage of 139,02€ (409€ x 33,99%, the corporate tax rate). The actual cost of the special taxation consequently only amounts to 169,98€ (309 - 139,02).