The end of social security tax exempt equity plans?

On 20 May 2019, the Belgian Supreme Court confirmed a Brussels Labor Court of Appeal judgment in which the court held that compensation granted and paid by a third party to employees was compensation borne by the employer for levy of social security tax, since it constituted consideration for the services rendered to the employer.

The factual situation in this case was very peculiar in that a third party (Sisley, the French cosmetics concern) paid a bonus to employees of an independent retail chain (Planet Parfum) for the sale of its products in the PP shops. Although the bonus was actually paid and financially borne by a third party, the Brussels Labor Court of Appeal nevertheless considered the bonus to be compensation borne by the employer (PP) since it clearly - and undisputedly – constituted consideration for the performance of labor services to the employer. So the bonus attracted social security tax, which requires compensation 'to be borne by the employer'. This ruling has now been confirmed by the Supreme Court.

Its effect in corporate practice could be that henceforth all equity-related compensation granted by a third party (group parent company or otherwise) becomes subject to Belgian social security tax even when paid for by the third party (and not charged back to the Belgian employing company), as long as it would constitute consideration for the labor services rendered. Since most if not all compensation granted to employees obviously constitutes consideration for labor, many commentators have already publicly announced that this recent ruling is the end for social security tax exempt equity plans in Belgium.

We do not agree. The Supreme Court's ruling, read in conjunction with the advice of the public prosecutor in this case, leads us to believe that the very peculiar factual background, and the way the case was defended on the merits led to the ruling. On the merits, the defendant never challenged the assumption that the bonus constituted consideration for the labor performed to the benefit of the actual employer. Therefore, failing any evidence of a separate causa for the payer of the bonus to make the payment, other than the performance of the employment contract with the employer, the Labor Court of Appeal (and the Supreme Court) could not take any other approach to the legal issue. The mere fact that a bonus is paid for by a third party does not suffice to prove that it is not borne by the employing company, to the extent that the third party does not have (or does not prove) a separate reason, ground or causa for such payment.

In that sense, this Supreme Court ruling is in perfect alignment with a previous ruling of 10 October 2016, on a similar legal issue. In the 2016 case, the Supreme Court held that, although the payment of a benefit was made and financially borne by a third party, the benefit was 'borne by the employer' (for levy of social security tax) since the employment contract gave a contractual ground to the beneficiaries to claim the grant from the employer. In the present case, apparently there was no express contractual or unilateral ground for the bonus (not with the payer at least), but the mere fact that the defendant did not challenge and accepted that the bonus constituted direct consideration for the labor performed to the benefit of the employing company was inevitably sufficient for the labor court to make the direct link with the employment contract.

As the public prosecutor expressly stated, most benefits are granted by virtue of the employment relationship, but that does not substitute for the requirement that the benefit be borne by the employer, which remains a key part of the definition of compensation for these purposes. The legal dimension of the 'charge of the employer' is the existence of a particular (contractual or unilateral) ground for the grant. Sisley, the third party, did not prove nor offer the existence of that specific ground in the case at hand.

In our view, therefore, the key holding of this 2019 Supreme Court ruling arguably is that a benefit is not borne by the employer (and therefore not compensation for levy of social security tax) when a benefit is financially borne by a third party (the 10 October 2016 ruling) as a necessary but insufficient condition, and when the third party has a separate causa or ground for the grant of such benefit (contractual or unilateral in nature). That latter key part was missing in the Sisley case. Therefore the Supreme Court had no grounds to quash the decision that considered the benefits as consideration for the performance of the labor services to the employer.