If you work or plan to work as a director at a company in another country, make sure you are clear about the tax implications. Which portion of your directors’ remuneration is subject to taxation in which country? What actually constitutes directors’ remuneration? And do you need to take customary wages into account? In this article we will discuss a number of important points and pitfalls when working as a director of a foreign company.
What is a director in an international context?
The first question you need to ask yourself is: when are you considered a director for tax purposes? The Netherlands and the country in which the company is located may apply different definitions. The term director is often used for a person or legal entity that is a member of the board of directors, but the exact definition may differ from country to country.
The Dutch Tax Administration generally takes the position that it needs to concern someone who is at the head of the company and effectively runs the company. Yet in some cases the Netherlands will follow the definition used by the country in which the company of which you are a director is located. It is therefore essential to consult the applicable rules for each individual country.
Where is the remuneration taxed?
As a director resident in the Netherlands, your entire worldwide income is taxable in the Netherlands. This also applies to any directors’ remuneration you receive in your capacity as a director of a foreign company. This remuneration needs to be reported in your Dutch personal income tax return.
Sometimes, the remuneration is also taxable under the national law of the country of the company for which you fulfil the role of director. The Netherlands has concluded agreements in the form of tax treaties with a large number of countries in order to prevent double taxation. On the basis of these agreements, a director may be eligible for prevention of double taxation in their country of residence. Depending on what has been agreed in the treaty, this can be provided in a variety of ways. For example, by crediting the foreign tax in the Dutch tax return. Or by fully exempting the directors’ remuneration that is attributable to the foreign company. The Netherlands usually applies the credit method to a directors’ remuneration that is taxed in another country, which effectively results in the taxation being split between the Netherlands and the other country.
Please note: if your work as a director is performed in multiple countries, it is even more important to keep accurate records of your working days and the allocation of the remuneration. Our advisors would be happy to discuss the relevant aspects and a practical approach to this matter.
Difference between income from employment and directors’ remuneration
In addition to your duties as a director, you might carry out regular duties for the foreign company. Or perhaps your work does not fully qualify as directors’ activities under the applicable tax treaty. In such cases, you need to establish clearly which portion of your income relates to which type of work. The division of taxing rights between countries is often regulated differently for different types of income. Remember that this not only covers actual monetary payments but also payment in kind, such as shares, options and a company car.
Customary wages at a foreign company
If you live in the Netherlands and own a substantial shareholding in a company, you need to take into account customary wages if you carry out work for your company. This also applies if you own, directly or indirectly, a substantial interest in a foreign company. For Dutch tax purposes, customary wages also need to be taken into account for this work, unless the treaty between the Netherlands and the other country stipulates otherwise. How high the customary wages should be and whether you can claim a deduction to prevent double taxation depends on your individual situation.
Finally
If you carry out directors’ activities for a company in another country, make sure you are clear about your tax position. Are you viewed as a director for the application of the tax treaty? Which portion of your remuneration is classed as director’s remuneration? How does the customary wages scheme affect your director’s remuneration? And how do you prevent double taxation?
From the perspective of the foreign company, it is important to identify the obligations clearly too. Do you need to comply with a registration or payroll obligation in the Netherlands or another country? Will directors’ activities carried out in the Netherlands result in the foreign company suddenly constituting a permanent establishment in the Netherlands? And when will social security obligations arise in the Netherlands?
Our Employment Advisory specialists would be happy to help you analyse your tax position. This will provide clarity regarding obligations that apply to both the director and the company and ensure that you know what these obligations are. We are of course also at your service to help with other matters relating to Global Mobility and international growth. If you have any questions about international labour law, administrative obligations, tax liabilities and social security, our Employment Advisory advisors would be happy to help you!
The legislation and regulations in this area may be subject to change. We recommend that you discuss the potential impact of this with your Baker Tilly advisor.
