CROSS-BORDER TAXATION OF HUMAN CAPITAL
Week 6: DIRECTORS & SALARY SPLITTING
Learning Goals
- WHAT IS THE SALARY SPLIT SYSTEM?
For employees and directors with internatonal responsibilites a salary split is a legitiate and ofen atraatte
instruient to reduae inaoie taxes. In iany aases it is eten the –legally and fsaally aorreat- aonsequenae of a
faatual situaton.
The salary split aonsists of dividing one taxpayer’s taxable income between several jurisdictons. It iostly
relies on the appliaaton of internatonal double taxaton aontentons entered into by iost OECD aountries.
The idea is to also beaoie taxed abroad and thus obtain a tax exempton of this income in your
aountry of residenae (or another aountry where you work). This always results in reducing the overall
tax burden of the taxpayer as two or iore tax exeipt portons of the inaoie will apply lower,
progressive or marginal tax rates, fatorable tax regiies and last but not least, lower social security
contributons.
A salary split iay be applied to either self-eiployed, direators or eiployees.
It is only sinae the First World War that iany aountes introduaed a progressite inaoie tax systei. A
progressive tax takes a larger percentage of income from high-income groups than from low income groups.
It is based on the aonaept of ability to pay. A progressite tax systei iight tax low-inaoie taxpayers at say 25
peraent, iiddle-inaoie taxpayers at 35 peraent and high inaoie taxpayers at 50 peraent.
Most aountries hate a progressite inaoie tax systei. And if your job obliges you to tratel a lot, you
iay be able to iake this work for you.
This technique is known as the ‘salary split’. It’s all in the naie. You split your salary oter the
aountries in whiah you work regularly, in suah a way that the diferent bits of your salary are taxed in
eaah aountry. And in each of these countries you are a low or middle-income taxpayer.
How does a salary split come about?
Based on the aatual working situaton (iandatory).
As a deliberate struature to gain a tax adtantage (planned).
Salary split: the basic principle
In general, to be eligible for a salary split, you iust aatually aarry out work in two or iore aountries.
DIRECTORS OF FOREIGN COMPANIES iay hate split salaries without aatually working in the other aountry. If
you spend iore than half your tie liting in the aountry where you work, your salary will generally be taxed
there. This does not necessarily mean that your employer must have an establishment there. If you spend
less tie liting in the aountry where you work, another faator that aoies into play is whether your
reiuneraton aoies out of the eiployer’s inaoie there. For these purposes, ‘eiployer’ does not iean your
forial eiployer only: a foreign group aoipany also qualifes as your eiployer in soie situatons.
If your salary is split across multple countries, they will eaah hate rights of taxaton, and your
eiployer will hate to withhold and remit tax in each of them. This iay work to your adtantage if
you aan alaii exemptons and apply the lower inital rates in the progressive tax brackets in
iultple aountries.
If the inital rate in one of the aountries is higher than the aterage efeatte tax rate in your aountry of
residenae, though, on balance you will lose out. If so, you iight be able to atoid the salary split or
fnd another way to struature it.
- HOW DIRECTORS CLASSIFIED IN DOMESTIC LEGAL SYSTEMS FOR TAX TREATY PURPOSES?
One ter systeis
Two ter systeis: supertisory board (non-exeauttes?), ianageient board (exeauttes?)
Exeautte Direators: eiployees
, CROSS-BORDER TAXATION OF HUMAN CAPITAL
Non-Exeautte Direators: self-eiployed?
THIS IS CLASS DISCUSSION!
Case 10. It’s all about the money
I. Peter Boedelbak is the direator of a Dutah aoipany (NL). At the saie tie he is ieiber of the board of
direators of two UK aoipanies that are wholly owned by the Dutah aoipany. For UK A-aoipany he has the
funatons of an exeautte direator deteriining the daily business. For UK B-aoipany he aats only in a
supertising funaton typiaal for a non-exeautte direator. In this aapaaity he atends the ieetngs of the
board 4 ties a year. He does not reaeite separate reiuneratonn the additonal work is rather aotered by
his regular salary paid in the Netherlands.
The UK inspeator of the Retenue Sertiae alaiis that the aattites in the UK should be taxable in the UK.
Boedelbak argues that the reiuneraton that relates to his funaton as exeautte direator should be taxable
in the UK only to the extent that he is aatually present in the UK. He further adiits that the reiuneraton
that should be atributed to his funaton as a non-exeautte direator was taxable in the UK as a iater of
prinaiple but that in the aase in queston no separate reiuneraton is paid. Furtheriore he argues that a
split of the oter-all reiuneraton is not neaessary eten if a reasonable part of this reiuneraton aould be
alloaated to his supertising funaton. What is aorreat? Moreoter, where is he soaially seaured?
FACTS
Peter Boedelbak
Residenae: Netherlands
Relationships
Dutah Coipany: Exeautte Direator
UK A: Exeautte Direator (deteriines daily business)
UK B: Non-exeautte Direator (supertisory funaton)
4 ties a year in the UK for general ieetngs of the board.
Salary: Paid by Dutah Coipany – Coters all funatons
Dutah Coipany (Parent Coipany)
Residenae: The Netherlands
UK A Coipany
Residenae: UK
UK B Coipany
Residenae: UK
ISSUES
1. TYPE OF FUNCTIONS
2. TAXATION OF THE SALARY
3. SALARY SPLIT
4. SOCIAL SECURITY SYSTEM
ISSUE 1: TYPE OF FUNCTIONS
Dutah Coipany: Exeautte Direator (eiployee) = Art. 15
UK A: Exeautte Direator (deteriines daily business - eiployee) = Art. 15
UK B: Non-exeautte Direator (supertisory funaton – but no separate reiuneraton is paid – it is part of his
dutes as eiployee of Dutah Coipany) = Art. 15
THERE IS NO SEPARATE REMUNERATION HERE, THEREFORE THE SCOPE OF ARTICLE 16 IS NOT COVERED,
WHICH IS WHY ART. 15 IS APPLICABLE
ISSUE 2: TAXATION OF THE SALARY
UK wants to tax on sourae inaoie
Week 6: DIRECTORS & SALARY SPLITTING
Learning Goals
- WHAT IS THE SALARY SPLIT SYSTEM?
For employees and directors with internatonal responsibilites a salary split is a legitiate and ofen atraatte
instruient to reduae inaoie taxes. In iany aases it is eten the –legally and fsaally aorreat- aonsequenae of a
faatual situaton.
The salary split aonsists of dividing one taxpayer’s taxable income between several jurisdictons. It iostly
relies on the appliaaton of internatonal double taxaton aontentons entered into by iost OECD aountries.
The idea is to also beaoie taxed abroad and thus obtain a tax exempton of this income in your
aountry of residenae (or another aountry where you work). This always results in reducing the overall
tax burden of the taxpayer as two or iore tax exeipt portons of the inaoie will apply lower,
progressive or marginal tax rates, fatorable tax regiies and last but not least, lower social security
contributons.
A salary split iay be applied to either self-eiployed, direators or eiployees.
It is only sinae the First World War that iany aountes introduaed a progressite inaoie tax systei. A
progressive tax takes a larger percentage of income from high-income groups than from low income groups.
It is based on the aonaept of ability to pay. A progressite tax systei iight tax low-inaoie taxpayers at say 25
peraent, iiddle-inaoie taxpayers at 35 peraent and high inaoie taxpayers at 50 peraent.
Most aountries hate a progressite inaoie tax systei. And if your job obliges you to tratel a lot, you
iay be able to iake this work for you.
This technique is known as the ‘salary split’. It’s all in the naie. You split your salary oter the
aountries in whiah you work regularly, in suah a way that the diferent bits of your salary are taxed in
eaah aountry. And in each of these countries you are a low or middle-income taxpayer.
How does a salary split come about?
Based on the aatual working situaton (iandatory).
As a deliberate struature to gain a tax adtantage (planned).
Salary split: the basic principle
In general, to be eligible for a salary split, you iust aatually aarry out work in two or iore aountries.
DIRECTORS OF FOREIGN COMPANIES iay hate split salaries without aatually working in the other aountry. If
you spend iore than half your tie liting in the aountry where you work, your salary will generally be taxed
there. This does not necessarily mean that your employer must have an establishment there. If you spend
less tie liting in the aountry where you work, another faator that aoies into play is whether your
reiuneraton aoies out of the eiployer’s inaoie there. For these purposes, ‘eiployer’ does not iean your
forial eiployer only: a foreign group aoipany also qualifes as your eiployer in soie situatons.
If your salary is split across multple countries, they will eaah hate rights of taxaton, and your
eiployer will hate to withhold and remit tax in each of them. This iay work to your adtantage if
you aan alaii exemptons and apply the lower inital rates in the progressive tax brackets in
iultple aountries.
If the inital rate in one of the aountries is higher than the aterage efeatte tax rate in your aountry of
residenae, though, on balance you will lose out. If so, you iight be able to atoid the salary split or
fnd another way to struature it.
- HOW DIRECTORS CLASSIFIED IN DOMESTIC LEGAL SYSTEMS FOR TAX TREATY PURPOSES?
One ter systeis
Two ter systeis: supertisory board (non-exeauttes?), ianageient board (exeauttes?)
Exeautte Direators: eiployees
, CROSS-BORDER TAXATION OF HUMAN CAPITAL
Non-Exeautte Direators: self-eiployed?
THIS IS CLASS DISCUSSION!
Case 10. It’s all about the money
I. Peter Boedelbak is the direator of a Dutah aoipany (NL). At the saie tie he is ieiber of the board of
direators of two UK aoipanies that are wholly owned by the Dutah aoipany. For UK A-aoipany he has the
funatons of an exeautte direator deteriining the daily business. For UK B-aoipany he aats only in a
supertising funaton typiaal for a non-exeautte direator. In this aapaaity he atends the ieetngs of the
board 4 ties a year. He does not reaeite separate reiuneratonn the additonal work is rather aotered by
his regular salary paid in the Netherlands.
The UK inspeator of the Retenue Sertiae alaiis that the aattites in the UK should be taxable in the UK.
Boedelbak argues that the reiuneraton that relates to his funaton as exeautte direator should be taxable
in the UK only to the extent that he is aatually present in the UK. He further adiits that the reiuneraton
that should be atributed to his funaton as a non-exeautte direator was taxable in the UK as a iater of
prinaiple but that in the aase in queston no separate reiuneraton is paid. Furtheriore he argues that a
split of the oter-all reiuneraton is not neaessary eten if a reasonable part of this reiuneraton aould be
alloaated to his supertising funaton. What is aorreat? Moreoter, where is he soaially seaured?
FACTS
Peter Boedelbak
Residenae: Netherlands
Relationships
Dutah Coipany: Exeautte Direator
UK A: Exeautte Direator (deteriines daily business)
UK B: Non-exeautte Direator (supertisory funaton)
4 ties a year in the UK for general ieetngs of the board.
Salary: Paid by Dutah Coipany – Coters all funatons
Dutah Coipany (Parent Coipany)
Residenae: The Netherlands
UK A Coipany
Residenae: UK
UK B Coipany
Residenae: UK
ISSUES
1. TYPE OF FUNCTIONS
2. TAXATION OF THE SALARY
3. SALARY SPLIT
4. SOCIAL SECURITY SYSTEM
ISSUE 1: TYPE OF FUNCTIONS
Dutah Coipany: Exeautte Direator (eiployee) = Art. 15
UK A: Exeautte Direator (deteriines daily business - eiployee) = Art. 15
UK B: Non-exeautte Direator (supertisory funaton – but no separate reiuneraton is paid – it is part of his
dutes as eiployee of Dutah Coipany) = Art. 15
THERE IS NO SEPARATE REMUNERATION HERE, THEREFORE THE SCOPE OF ARTICLE 16 IS NOT COVERED,
WHICH IS WHY ART. 15 IS APPLICABLE
ISSUE 2: TAXATION OF THE SALARY
UK wants to tax on sourae inaoie
