Directors and board members – International taxation
Directors and members of the supervisory board are taxed on their worldwide income in the Netherlands if they are considered tax residents in the Netherlands. This is also the case for those who perform their activities abroad, for example for an international entity. The remuneration has to be included in the annual tax return. In order to prevent double taxation on such remunerations countries concluded specific rules in tax treaties dealing with the allocation of taxing rights.
Directors and board members – interpretation
Firstly, it is important to determine what is considered a director and commissioner from a fiscal perspective. Both countries, i.e. the country of residence of the director or commissioner and the resident country of the entity, could practice different meanings. This may therefore pose a risk of double taxation. In international situations a very brief description is practiced: a natural person or legal entity in the capacity of a member of the board of directors or supervisory board.
The Dutch tax authorities will in most cases state that a director or commissioner is someone at the top of the hierarchy of the business effectively managing the business (director) or supervising advising the board (commissioner). Alternatively, the Dutch tax authorities may follow the interpretation of resident country of the entity.
Wage or directors’ fee?
The allocation of taxing rights between countries depends on the source of income. Therefore, the second issue concerns the qualification on the remuneration. Remunerations received by a director or commissioner for performing activities of a regular employee will qualify as wage and will therefore be treated for tax purposes as such. Consequently, different rules for the allocation of taxing rights will apply. In addition, directors’ fee includes payments in kind, e.g. stock options, shares and company cars.
Taxing country for director’s fees
Tax treaties usually state that directors and commissioners may be taxed in the country of residence of the company. It is up to the Netherlands as country of residence of the director and commissioner to provide for ways to prevent double taxation. This will be done by means of exemption or deduction.
In essence, allowing for a deduction means a tax credit on the Dutch tax payable on the remuneration. In case the foreign tax is less that the Dutch tax payable, part of the remuneration is taxed in the Netherlands. If the exemption method applies, there is no tax due in the Netherlands. Usually, a deduction applies for directors’ fees. However, under specific circumstances the exemption method may be applied. This is the case if the director or commissioner is confronted with a heavier tax burden than a regular employer under comparable circumstances. In practice, the exemption method applies inter alia for Dutch resident directors and commissioners of companies established in the United States, United Kingdom, Belgium and Germany.
Please note that the above only applies to two-country situations. If more than two countries claim taxing rights, e.g. because are performed performed in multiple countries, additional analysis is required.
Concluding directors’ fees
The above provides a brief description of the international fiscal aspects of directors and board members of foreign entities. Besides the qualification of the capacity and the remuneration it is of great importance to determine the method to prevent double taxation. Especially directors and commissioners of companies established in the United States, United Kingdom, Belgium and Germany may find it worthwhile to (re)consider their tax position.