2018 Tax Plan – fictitious employment for non-executive directors of listed company cancelled


2018 Tax Plan – fictitious employment for non-executive directors of listed company cancelled

2018 Tax Plan - Budget Day (Prinsjesdag)

Fictitious employment of non-executive directors for payroll tax purposes will be cancelled. Consequently, remunerations of non-executive directors will no longer be subject to payroll tax, just like supervisory directors’ remunerations.

5 October 2017


The legal relationship of company directors is twofold: they have both a legal personal relationship and a relationship under employment law. The relationship under employment law has been regarded as an employment contract for many years now. This double relationship had major consequences from a social perspective. Directors who invoked the provisions of their employment contracts on leaving the company could claim considerable severance pay. This is contrary to the Corporate Governance Code, which stipulates that severance payments for managing directors of listed companies should not exceed their annual salaries. On 1 January 2013, an exception was therefore introduced into the Dutch Civil Code for directors of listed companies, as a result of which their legal relationships no longer qualify as employment contracts.

Employment for payroll tax and employee insurance schemes

The general rule is that payroll tax and employee insurance contributions are charged at the level of the employee. An employee is a natural person who has an employment relationship under private law with an employer. So the concept of employment is based on an employment contract under civil law, i.e., a contract by which:

  • the employee undertakes to perform personal work during a certain period of time;
  • the employer undertakes to pay wages for that work; and
  • the employer and the employee have a relationship of authority.

Case law provides that salaried company directors are considered to be employed by the company. The relationship of authority is brought about by the general meeting of shareholders being authorised to instruct the directors. Directors’ remunerations are subject to payroll taxes (payroll tax/national insurance contributions, employee insurance contributions and income-related contributions under the Healthcare Insurance Act).

Fictitious employment of listed company directors

The fact that the Dutch Civil Code provides that the legal relationship between managing directors and listed companies does not qualify as an employment contract, would also affect the position for payroll taxes. For this reason, the Dutch Wages and Salaries Tax Act (Wet op de loonbelasting) provides for the concept of fictitious employment (fictieve dienstbetrekking) for listed company directors. An identical provision is included for the employee insurance schemes. With these fictions, the position of listed company directors remains unchanged for the purpose of payroll taxes, in spite of the change in the Civil Code.

Fictitious employment of supervisory directors

Fictitious employment also applied to supervisory directors and, consequently, payroll tax was due on remunerations paid to them. However, this fiction did not apply for the employee insurance schemes, so supervisory directors are not insured under these schemes. Following introduction of the Employment Relationships Deregulation Act (Wet Deregulering Arbeidsrelaties) on 1 May 2016, supervisory directors were allowed to omit application of the concept of fictitious employment. On 1 January 2017, fictitious employment for supervisory directors was cancelled. Supervisory directors can, however, still remain subject to payroll tax (and, e.g., continue to use the 30% facility) by opting in.

One-tier board

Dutch capital companies traditionally had a two-tier structure. The executive board is entrusted with the day-to-day management of the company and the supervisory board supervises the executive board. As discussed above, payroll taxes are due on directors’ remunerations, but since 2017 no longer on supervisory directors’ remunerations.

Since 2013, company law provides for the possibility to opt for a one-tier board in a company’s articles of association. In a one-tier model, executive and non-executive directors are on the same board. Non-executive directors roughly have the same responsibilities as supervisory directors in a two-tier model, be it that their duties are more comprehensive. Yet being on the board, their responsibility still is to direct the company; the chairmanship of the board is even reserved for non-executive directors. They are not allowed to also fulfil their position as director through a personal company. Similar to supervisory directors, the law permits them to only hold a limited number of positions (as a supervisory director or a non-executive director).

Up to 1 January 2017 the distinction between executive and non-executive directors was irrelevant for payroll tax purposes. Directors of non-listed companies have (real) employment relationships vis-à-vis the company and directors of listed companies work in a fictitious employment relationship. Either way, their remunerations are subject to payroll tax. However, for the application of the employee insurance schemes, a discussion could arise since the fiction for listed company directors does not distinguish between non-executive directors and executive directors. Strictly speaking, a non-executive director of a listed company would be employed for the purpose of employee insurance schemes. Yet this discussion never took place, as it was considered to be of limited relevance.

Fictitious employment of non-executive directors cancelled

When fictitious employment for supervisory directors was cancelled on 1 January 2017, the distinction between executive and non-executive directors became relevant for payroll tax purposes, too. After all, the notion of fictitious employment of listed company directors for payroll tax purposes does make this distinction. When the Senate debated on the Tax Simplification Act 2017 (Fiscale Vereenvoudigingswet 2017), a VVD representative asked whether the cancellation of fictitious employment for supervisory directors would also apply for non-executive directors in a one-tier board. The Minister of Finance thought this to be “an interesting but complex issue that required further deliberation”. It would in any way complicate the implementation, as employment relationships would have to be assessed, too. The current government obviously attached greater importance to equal treatment than to implementation, and proposed to do away with this inequality. Based on the Explanatory Memorandum, this will produce the following situations:

  • executive directors of non-listed companies: real employment
  • executive directors of listed companies: fictitious employment
  • non-executive directors of non-listed companies: no employment
  • non-executive directors of listed companies: no employment

The distinction between executive and non-executive directors will become manifest in the Trade Register.

Commentary Deloitte

Restricting fictitious employment of listed company directors to executive directors at least clarifies the matter a bit. Also the debate on the position of non-executive directors in non-listed companies seems to be settled, since the Explanatory Memorandum explicitly states they are no longer subject to payroll tax either.

The fiction will not (yet) be changed for the employee insurance schemes. Strictly speaking, this would imply that non-executive directors of listed companies would be insured under the employee insurance schemes as a result of the respective provisions. It would have been nice if the same policy was pursued for the employee insurance schemes. But it is not too late. The Social Security (Miscellaneous Provisions) Act (Verzamelwet SZW) is not expected to be published until late November or early December.

It is also still unclear what VAT consequences this will have. Supervisory directors are in principle subject to VAT, but this seems not to be the case for non-executive directors. So there still is unequal treatment, though it shifted from payroll tax to VAT - which is quite remarkable.

Budget Day 2017 - Webcast

After Budget Day, Deloitte Tax Lawyers discussed the new proposed bills during a webcast, on Wednesday September 20, 2017. You can see the recorded webcast (in Dutch) here.

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