The customary wage doctrine applies to any employee who entertains a substantial interest in the company that employs him or her. Such a substantial interest will be deemed to exist where the employee, either on his or her own or together with his or her fiscal partner,
- is the holder of a 5% or greater stake in the company’s share capital,
- is entitled to acquiring a 5% or greater shareholding in the company’s capital,
- is the holder of profit sharing certificates conferring entitlement to a 5% or greater share of the company’s annual profit, or
- is the holder of 5% or more of the voting right at the general meeting of a cooperative association or society.
The central plank of the customary wage doctrine is that the substantial interest holder’s wage should be in conformity with the level and scope of his or her duties, as should that earned by the substantial interest holder’s fiscal partner where the latter too works for the company.
The customary wage regime defines the minimum level of the substantial interest holder’s wage as:
- 75% of the wage earned in the position that offers the closest match for that held by substantial interest holder,
- or the higher wage earned by the top earner of the company or of any of the latter’s affiliated companies,
- to a minimum of € 45,000 at all times.
The comparison with the wage earned in the position that offers the closest match for the job in hand does away with the need to look at wages earned by members of staff who perform exactly the same duties, e.g. an orthodontist’s customary wage may be determined by looking at the wage earned by an employee dentist.
An affiliated company is defined as:
- any company a third or more of the share capital of which is held by the employee in question, or
- any company that is the holder of a similar participating interest in the employer company, or
- any company a third or more of whose share capital is held by a third party cum holder of a similar participating interest in the employer company.
It is permissible for the wage to be set at a lower level where:
- it is plausible that the wage earned in the position that offers the closest match would turn out lower than € 45,000, in which case the customary wage will be set at 100% of the wage earned in the position offering the closest match, or
- it is plausible that 75% of the wage earned in the position that offers the closest match would turn out lower than that earned by the top earner of the company or of an affiliated entity, in which case the customary wage will be set at 75% of the wage earned in the position offering the closest match to a minimum of € 45,000, with the Tax and Customs Administration having the option by producing evidence to the contrary to make it plausible that the customary wage should be set at a higher level.
The customary wage regime applies to any company a substantial interest in which is held by an employee who also works for the company, as the following example illustrates.
A group of companies is made up of a parent company and a subsidiary. The parent company is the holder of the subsidiary’s entire share capital. The parent company’s share capital in turn is held by the director cum controlling shareholder, who works for the parent and subsidiary companies alike. The customary wage regime applies to both companies owing to the fact that the employee is a substantial interest holder at both levels.
The customary wage is defined as the wage inclusive – where appropriate – of the addition in connection with the private use of a company car. Docked pension premiums do not form part of the wage. The use of specific exemptions as per the work-related expense scheme too can impact on the customary wage.
The customary wage regime also applies to employee insurance schemes unless the employee him or herself is a director cum controlling shareholder, as a category of operative by whom employee insurance schemes are not (always) participated in. The criteria for a director cum controlling shareholder are as follows:
- the decision to dismiss or discharge the employee should rest with him or herself, or the employee should not be dismissible or dischargeable against his or her will;
- the employee on his or her own or together with his or her spouse and his or her relatives up to and including the third degree should be the holder of shares representing two thirds or more of the votes, resulting in his or her (together with his or her spouse and/or relatives where appropriate) being in a position to decide on his or her own dismissal or discharge or in his or her not being dismissible or dischargeable against his or her own will;
- the employee and the other executive directors should collectively be the holders, in equal portions, of the company’s entire share capital;
- the employee should be in a position, via a legal entity of which he or she is the executive director or shareholder, to exercise such control at the level of the company as to enable him or her to decide on his or her own dismissal or discharge or result in his or her not being dismissible or dischargeable against his or her own will.
Each of the above scenarios require the executive director him or herself to be a shareholder – be it directly or indirectly – in the company’s capital. Where reference is made to “executive director”, this should be interpreted as referring to the constitutional director in question, or to the person who actually carries out the corresponding duties where the executive director is a legal entity.
Start-up companies
A somewhat relaxed regime applies to the substantial interest holder who works for a start-up company, by allowing the customary wage to be set, for a maximum of three consecutive years, at the level of the statutory minimum wage or lower wage as per the position offering the closest match. The criteria for a start-up company are as follows:
- the company in question should have secured its R&D certificate for the calendar year in question;
- the company should be entitled to the increased start-up rate;
- the company should not exceed the “de minimis” threshold for state aid as per the European Convention.
Fictitious wage
The company has the option of paying the substantial interest holder a less-than-customary wage. The difference between the customary wage and the wage payment is required to be taken to the payroll records as fictitious wages. Withholding taxes are levied on the entire customary wage, i.e. inclusive of the fictitious wage component. In the event that the employer company pays no wages at all to its substantial interest holder employee, all of the latter’s customary wage will have fictitious wage status.
Customary wage of € 5,000 or less
The company will be exempt from paying withholding taxes on the customary wage of a substantial interest holder to whom it pays no wages at all and whose duties are sufficiently minimal to warrant a customary wage of no more than € 5,000. The fictitious wage regime will not apply in this scenario. It should be noted that the € 5,000 maximum applies to all duties performed by the substantial interest holder on behalf of the group of companies in which he or she holds his or her substantial interest.
The company will be liable for withholding taxes where it pays a wage to its substantial interest holder even if the wage in question amounts to less than € 5,000.
Dutch version: Gebruikelijk loon