Amendment of Taxation Rights for Compensation of Corporate Management under the New Tax Treaty between the Netherlands and Belgium

Current tax treaty

Compensation paid to a member of corporate management is currently allocated to the country of establishment of the company under the existing tax treaty between the Netherlands and Belgium.

Right to tax under the new tax treaty

Even under the new treaty, the country of establishment of the company retains the taxation rights over this compensation. However, what is new is the differentiation between activities categorized as corporate management and activities categorized as other activities. For instance, activities related to daily management are categorized as other activities.

The treaty explicitly assigns the right to tax compensation for activities categorized as other activities to article 14 of the treaty, as if it were income from employment. Under this article, the taxation rights  regarding the abovementioned compensation are prorated among the physical work countries of the employee. Only under strict conditions does the employee's country of residence retain full taxation rights, unlike article 15 (corporate management), where the country of establishment of the company has full taxation rights.

Therefore, it is possible that compensation, which is currently only taxed in the Netherlands or Belgium, may be (partially) taxed in the other country in the future.

Avoidance of double taxation

Furthermore, the method by which the Netherlands prevents  double taxation  varies per treaty article. For income from employment (and in the future, the compensation for activities categorized as other activities), the Netherlands applies the exemption method. For compensation for those activities categorized as  activities of corporate management, the settlement method is applied. Depending on the facts and circumstances, one method may be financially more favorable than the other.

Under the new treaty, it becomes even more important to establish a clear (written) distinction between the compensation related to activities categorized as corporate management and compensation for activities categorized as other activities.

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