New Customary Salary Rules

As of January 1st, 2015, Customary Salary Rules (in Dutch: gebruikelijkloonregeling) apply to an individual who works for a company in which he holds a so-called substantial interest. Someone holds a substantial interest, for example, if he holds (in)directly at least 5% of the issued capital, either solely or with his partner. Customary Salary Rules determine the minimum salary of the director-major shareholder (hereinafter: the ‘DMS’) for tax purposes.

Salary versus Dividend income
The Customary Salary Rules were introduced to prevent the possibility for a DMS to only receive a marginal salary or even no salary at all. Before introduction of the Customary Salary Rules this would allow the DMS to pay only a small amount of wage tax, or even no wage tax at all. Instead of receiving a salary, the DMS could choose to receive (lower taxed) dividend income. Salary is subject to progressive tax rates of up to 48.25%. Dividend income is subject to a special rate of 19.5% for purposes of individual income tax. By declaring dividends instead of granting (more) salary, tax benefits could be realized.

Minimum Salary
What should be the minimum salary be according to the new Customary Salary Rules? As might be expected, this depends on the circumstances. The minimum salary can be related to the turnover of the company, the salary for a similar employment elsewhere in the market or the salary paid to other employees of the company concerned or affiliated entities:

Turnover related
In general, the salary should be at least an amount that is equal to 50% of the turnover of the company. However, in case the turnover of the company exceeds NAf 100,000, the customary salary should be at least NAf 50,000.

Similar employment related
If it is plausible that a lower salary is usually paid elsewhere in the market for similar employment, this lower salary may be applied. In other words, the market value salary (as if there was no substantial shareholding in the company) has to be taken into account

Other employees related
When other employees are working for the company concerned or affiliated companies, the salary should not be lower than the highest salary of those other employees. However, if it is likely that the salary of the DMS should be lower considering the market value salary, then the salary should not deviate more than 30% from that market value salary. In this case, the salary should be at least equal to either 50% of the turnover or NAf 50,000 if the turnover exceeds NAf 100,000.

Exceptions and Special Rules
The new Customary Salary Rules do not apply to every DMS. Depending on the type of company in which the shares are held, one can be excluded from the Customary Salary Rules. For example, when it concerns a Tax Exempt Company there is no obligation to apply these rules. Also, when the turnover is less than NAf 25,000 per year, the Customary Salary Rules do not apply. Furthermore, special rules can apply when a DMS is working within a group structure for more than one company. In such cases, the total turnover of all the affiliated companies will be taken into account. Under specific circumstances one can ask the Tax Inspector for an exception to the general rules.

Conclusion
The new Customary Salary Rules may result in wage tax obligations for the DMS and possibly a higher amount of wage tax due. Probably the most important aspect is to determine the (minimum) amount of salary that can be regarded as customary. For some of the DMS, the tax impact of the new rules can be significant. For others, given the different salary tests and the introduction of special rules and exceptions, the ultimate tax effect of the Customary Salary Rules is under circumstances limited.

If you would like to know the possibilities for your situation, please feel free to contact the tax professionals of Meijburg & Co Caribbean. You can visit our website www.meijburgcaribbean. com or send an e-mail to meijburgcaribbean@kpmg.com.