Only crazy people work for shares
THE BELGIAN COMPANY CODE (Wetboek van Vennootschappen en Verenigingen – WVV) came into effect last month. The possibility to contribute to a company’s capital with one’s work is one of the Code’s signature reforms. Or to put it in the terminology of the old code: it is now possible to contribute to the capital of the company by working for that company. Here, instead of being remunerated in cash, the work is rewarded with shares in the company.
IT CREATES OPPORTUNITIES, a most welcome change. In the past, you had to have financial resources to become a shareholder. Participation in corporate shareholding was thus primarily reserved for the wealthy. That was never a sufficient condition for success, though. Besides money, talent, creativity and engagement are equally necessary. A company is simply a legal fiction. It needs people in order to function. Or to quote a colleague’s quip: “I have never seen anyone go to the restaurant with a company, but I have already managed to pay the bill for many companies.”
PEOPLE WHO DO NOT have the financial resources to subscribe to shares, but who are brimming with energy, creativity and zest for work, can now become shareholders in exchange for their labour. This creates a bond and commitment, while also stimulating entrepreneurship. In turn, it also benefits the economy.
THE PROBLEM IS THAT the tax authorities don’t trust the principle. Out of basic fear, they promptly made sure to enshrine in the law that the contribution of labour may never give rise to fiscal capital, with far-reaching consequences. The shareholders who make a contribution in cash will later get their contribution back to tax-free. Yet, this does not apply to the shareholder who has contributed work. 30 percent withholding tax will be levied on the repayment of that shareholder’s contribution (for example in the event of liquidation). That would not be unfair, had the shareholder not already paid personal income tax on the shares acquired in exchange for his or her work. There is, however, nothing on this subject in tax law. In the logic of the tax law, those shares will therefore generally be subject to personal income tax which quickly reaches 50 percent in Belgium.
THIS CREATES A BIZARRE SITUATION. In order to allow people who have no cash to participate in shareholding, the legislator has made it possible for them to acquire shares through their work. But they must pay 50 percent tax on the share value right away. In other words, they need to have half of their contribution to the bank in order to pay the tax. Eventually, they can expect a further 30 percent withholding tax.
IF THAT PERSON FIRST works for the company as a self-employed person or as an employee, he or she also pay personal income tax. If he or she subsequently contributes his/her net after-tax pay to the company in exchange for shares, he or she will have created capital that he or she will later get back tax-free. The labour-based contribution, therefore, looks like it is going to be a dead duck.
THE PROBLEM HAS SINCE been identified and a less unfavourable tax system may be created for those shares. But for that to happen, we need a government. How things will turn out is everybody’s guess. Till then, one would have to be crazy to work for shares.