Ghent Court of Appeal presents its ruling on the remuneration theory: a well-trodden path or a barely explored avenue?

Here is something you often see happening in the corporate community: a company invests in a property, in usufruct or in full ownership, which is then made available (in part) to the managing director for private use. The remuneration theory is based on the principle that a company may deduct the costs related to such a property, as it comprises part of a benefit in kind granted to the managing director.

‘That is a typical example of the application of Article 49 of the Income Tax Code (ITC),’ explains Merckx. ‘A director can live on the property purchased by the company without at no cost: the use of this property comprises a lump-sum benefit on which he or she is taxed. The costs associated with the real estate, such as remodelling, furnishing expenses or real estate withholding tax, are deductible according to case law based on the remuneration theory.’

The press called this ruling groundbreaking, but according to Mr Merckx, this is by no means the case. ‘Some authors interpret this ruling as if the managing director’s performance did not have to be proven. That, of course, is not correct. The facts underpinning the court’s ruling are clearly substantiated and confirm what we as a firm always advise: make sure you have a water-tight case.’

The remuneration theory is founded on clear principles in terms of tax law, and offers companies a significant advantage. On the other hand, cases for this need to be backed by water-tight argumentation, and business owners should get started on this as early as possible. ‘Is the company planning to buy a property? Convene a general meeting and explicitly justify the investment in the minutes. Perhaps the property is located in a prime location where a significant capital gain can be realised over time, or the property lends itself perfectly to the rental market. These are all elements that demonstrate that the company will benefit from the real estate investment.’ 

In addition to the assets inherent to the property, it also pays to draw attention to the efforts and achievements of the managing director. This is particularly so in the context where a management company invoices the managing director’s performance to the operating company, says Merckx says.

‘For the purpose of tax optimisation, the company often pays the managing director a limited personal remuneration. This minimal remuneration is often disproportionate to the work this person performs, and the resulting monthly revenue achieved by the company. From this perspective, it makes sense for the managing director to receive appropriate compensation for his or her work, such as providing him or her with a place to live at no cost. I would certainly advise the company to justify this rationale in the minutes.’

In tax optimisation, everything hinges on well-founded documentation and clearly formulated minutes. Therefore, the best thing a company can do is to call in the expertise of a seasoned attorney in due time. The Novius tax team is composed of experienced lawyers, each with a solid academic background and unique area of expertise. What unites them is an in-depth and up-to-date knowledge of tax law.

‘Tax law is undergoing rapid developments. Staying up to date is of the essence in our profession, which is exactly why we hold fortnightly meetings at Novius where the team zooms in on recent legal developments, from landmark court decisions to tax rulings. This allows us to keep a close eye on current events, think critically and advise our clients with solid expertise.’

Personal, transparent legal support is key to this, says Merckx. ‘Our advice is carefully tailored to our clients’ individual situations. This also applies to drafting minutes: our lawyers always ensure that tax files are accompanied by the right documents and rationale in support of potential discussions later on. This is one of the ways in which we unburden our professional clientele to the greatest extent as possible, so that they can get back to focusing on their core business.’