Bonuses paid to employees as from 1 January 2008 benefit from a lighter tax and social security treatment, but only within certain limits and if they comply with certain conditions.
An Act of 21 December 2007 has introduced a new (and lighter) tax and social security regime for bonuses paid out as from 1 January 2008, implementing a collective bargaining agreement signed only, one day before, between the main employers' organisations and trade unions (Collective Bargaining Agreement nr 90 of 20 December 2007).
This is the latest piece of a broader puzzle aimed at encouraging employee participation in their employer's financial performance. In this respect, the new regime complements (without replacing) other existing incentives such as the (broadly more attractive) tax and social security treatment of stock option plans and the (significantly more cumbersome and less attractive) tax and social security treatment of profit sharing plans.
The new regime applies to any bonus paid out upon meeting one or more objective(s) linked to the employer's financial or even to some extent qualitative performance, as long as the objectives have been identified beforehand, that their realisation is not certain from the onset and that they are measurable in an objective way. Unfortunately, objectives linked to the stock exchange price of the employer's listed shares have been explicitly excluded (amongst other exclusions).
The objectives must be collective (at the level of a group of companies, a specific company or a group of employees) and may therefore never be linked to individual performance, nor limited to specific employees within a group, a company or a group of employees.
In order to be eligible, a bonus system may also not replace or be a substitute for any other element of the standard salary package. The only exception is the possibility to convert performance-linked elements of an existing remuneration package.
Last but not least, the bonus cannot exceed a maximum amount of €2,200 net per annum per employee.
If all conditions are met, the bonus will remain untaxed and only a specific social security levy of 33% of the amount paid will be applied and paid by the employer, who can then deduct the total cost of the bonus, including the social security levy, from his own taxable income.
This means that a bonus of €2,200 will result in:
the employee keeping €2,200;
the employer paying €726 to the social security agency; and
the employer being able to deduct the total cost of €2,926 from his taxable income.
Unfortunately, the initiative of introducing such a bonus system is quite cumbersome as all its elements must be approved by collective agreement between the employer and the employees' representatives or, when there is no elected representation, upon following a prior consultation procedure. The bonus plan must also be filed with the Federal Employment Department.
This new regime has usually been greeted as a step in the right direction, but its limited scope, its strict conditions and the difficulties of putting a bonus system into place have all been mentioned as elements in need of improvement/