Personal tax is levied through withholding taxes; a final settlement then takes place on the basis of the assessment notice, which shows whether additional tax must be paid or a refund is due. Most taxpayers are aware of withholding tax, which is deducted from the taxable remuneration of employees and business managers by their employer (company). The amount deducted is in principle calculated on the basis of a Royal Decree. The deducted withholding tax is then offset in the personal tax assessment notice against the final tax due.
As the tax account is settled up properly in the end, it could be argued that there’s no harm in deducting less withholding tax. After all, everything gets sorted out through the personal tax assessment notice. It is therefore worth pointing out that, mainly in the case of business managers, certain forms of compensation and/or benefits in kind are declared (on form 281.20) without withholding tax being deducted. This was tolerated by the tax authorities for a long time, up until a few years ago...
In recent years, checks on the correct deduction of withholding tax (based on the Royal Decree as mentioned earlier) have increased. The tax authorities have recently started checking and correcting the deduction obligations for withholding tax both on the part of the employer (company) that pays the remuneration and on the part of the beneficiary (often the business manager) who receives the remuneration. In concrete terms, the position is taken that if insufficient withholding tax has been deducted from the remuneration paid, this obligation on the part of the company remains outstanding, even if the business manager has paid the remaining personal tax due in the meantime. The eventual recovery of the excess personal tax paid by the business manager must be discussed at a later date with the relevant department.
If a check of this kind is made, the company that pays the remuneration will initially receive an amendment notice with regard to withholding tax. After approval, this is followed by the additional assessment against the company, including late payment interest. Once this assessment has been paid, the company can recover the additional withholding tax it has paid (but not the late payment interest) from the business manager, if the company does not intend to foot the bill for the additional withholding tax that it has paid.
After the company has paid the withholding tax assessment, the tax authorities turn their attention to the business manager. In the amendment notice that the business manager receives, it will be argued that the withholding tax that has not been deducted constitutes a benefit in kind on his or her part and that the taxable business manager’s remuneration must therefore be increased by the withholding tax eventually paid. This argument cannot be simply accepted, as the business manager’s taxable remuneration should not be increased if he/she has repaid (or will repay) the withholding tax to the company. However, the withholding tax that has not been deducted may constitute an interest-free advance, and hence a benefit in kind.
The withholding tax that has been paid is of course offsettable against the final tax liability. If this offset does not happen automatically, the manager can register an objection against the personal tax assessment within the year following receipt of the assessment notice, as additional withholding tax will have been paid to the treasury without being offset against the manager’s personal income tax. If the one-year period has expired, an objection can still be filed through an application for an ex officio exemption on the grounds of overtaxation. Experience suggests, however, that the refunding of overcharged taxes tends not to proceed smoothly...
Forewarned is forearmed. If you discover that little or no withholding tax is being deducted, we recommend that you take action. This could involve calculating the withholding tax correctly and paying it to the treasury, thus avoiding a time-consuming (and possibly expensive) procedure later on. If the problem occurred in a past year, it would be a good idea to make a spontaneous correction. This will at least limit the amount of late payment interest, given how much time the tax authorities have to perform checks and make assessments for withholding tax.
If you find yourself in this situation and would like assistance with this procedure, feel free to contact us.
