On 1 January 2019, deduction at source comes into effect, along with the calculation of a tax credit (the “CIMR” – Collection Modernisation Tax Credit) which obviates the tax on income received in 2018, which would in practice have led to double taxation in 2019. In this context, Parliament arranged that the CIMR would wipe out the tax payable for income received in 2018, providing, however, that the CIMR would not apply to exceptional income, so as to discourage any form of opportunistic behaviour. Within this exceptional income, recent comments by the taxation authority have made clear the fate reserved for exceptional bonuses that are dubbed “excessive.”

Definition of excessive bonuses

According to the legal definition, excessive bonuses received in 2018 are those that are granted without any link to the employment agreement or the appointment to an oversight position, or amounts over and above what these legal documents provide for, regardless of what they are called. These bonuses do not provide entitlement to the CIMR for the whole value of their amount.
A broad definition of the employment agreement or the appointment to an oversight position must be adopted, since it refers to riders or a collective bargaining agreement entered into before 1 January 2018.

Bonuses specified in the employment agreement

According to the comments published by the taxation authority, where the employment agreement (or equivalent) clearly defines the bonus that is given, that bonus is not deemed excessive if both the following criteria are fulfilled:
– the terms of payment (criteria of allocation and calculation procedure) are stated in the employment agreement;
– the amount paid in 2018 does not exceed what is stated in the employment agreement.

Bonuses not specified in the employment agreement

Depending on the government’s position, bonuses that are not mentioned in the employment agreement (or equivalent) or whose terms of payment are not fixed in that agreement are excluded from benefit of the CIMR. This is the case of discretionary bonuses, whether or not they are stated in the employment agreement, which are likely to change from year to year, without any specific reference to a calculation process.
There is, however, one exception to this rule: it is accepted that bonuses are not deemed excessive where both the following criteria are fulfilled:

– the bonus is granted and paid in a typical way;
– its value does not exceed that typically granted.

It should be noted that a typical bonus is a bonus that is granted and paid regularly each year (reference is made to 2016 and 2017), or where events occur regularly. For instance, a bonus that is given to each member of staff upon completion of the annual reviews would appear to fulfil the above condition.

With regard to the amount paid, the assessment will be made by analysing the bonuses received in previous years. The taxation authority has explained that where an employee received a bonus of € 29,000, € 31,000 and € 30,000 over the three previous years, a bonus of € 100,000 paid in 2018 would be deemed excessive in its entirety, and therefore not eligible for the CIMR.

Filing procedures

Taxpayers will be required to file their tax returns reporting income for 2018 in the spring of 2019. For a salaried employee, the value of his/her 2018 compensation will be stated in its entirety in the “wages and salaries” section. A new section is scheduled to appear for exceptional income, thus enabling the employee to break down his/her compensation (regular income / exceptional income) making it possible to identify income that is or is not eligible for the CIMR.

Tax determination

Given the responsibility imposed on the taxpayer, if there is doubt about the tax treatment that applies to his/her income, especially about the eligibility for the CIMR, the taxpayer is able to query the taxation authority and ask for a tax determination under the typical legal conditions. Thus, the taxation authority’s response is a formal position taken by it, which is binding upon it. The employer is also able to query the taxation authority, though it is not bound by it.

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