One of the measures introduced to combat the economic impact of the coronavirus crisis is that a director and major shareholder (DGA) may temporarily reduce his or her salary. The salary may even be (temporarily) reduced to zero. However, at the end of 2020, a review must be carried out to determine what salary the DGA should (ultimately) receive for the whole year.
Approval
The Tax and Customs Administration states on the Tax Service Providers’ Forum that it approves such a salary reduction. No prior consultation is required for this.
The aforementioned report does not indicate whether the so-called ‘standard wage scheme’ – under which the level of wages is to be determined at the end of 2020 – will be relaxed.
Unless these rules are relaxed in any way, the salary ultimately payable to the director and major shareholder will depend in part on how the economic situation develops. This can vary considerably from one company to another.
Unfortunately, it is not possible to reverse salary payments that have already been included in payroll tax returns (and to reclaim the payroll tax that has been paid).
Advantage
The advantage of a (temporary) reduction in salary is clear: this means that, for the time being, less income tax needs to be paid. Naturally, this also means there is no income tax for which the private limited company needs to apply to the tax authorities for a (special) deferral of payment.
The downside is that in early 2021, when the wages are finally included in the payroll tax return, the total payroll tax will have to be paid in one go.
Another drawback may be that more tasks need to be carried out in payroll administration, resulting in higher costs.
Management fee
Many directors and major shareholders (DGA) receive their salary from their holding company. The holding company then charges a management fee to the operating company or companies for this. It stands to reason that, with the reduction in the director-major shareholder’s salary, the management fee may also be reduced (temporarily), with the option to determine the management fee in more detail at the end of 2020.
It may be necessary to continue paying the management fee. After all, the director and major shareholder must be able to continue to cover his or her personal expenses. This can be achieved by withdrawing the management fee received by the holding company (or the funds already available to the holding company) via the current account. Alternatively, the director and major shareholder will have to live off his or her personal assets for a few months.
Lower wages now also in line with the fall in turnover
It is now also permitted for the director and major shareholder to receive a salary that is lower in proportion to turnover. The practical implications will be the same as those during the 2009 credit crisis (see the decision (as was the case at the time). This approval can be found in the decision we describe in our article Yet another batch of additional temporary emergency measures.