The importance of a formal agreement
for the reimbursement of
lump sum allowances for costs
proper to the employer 

Companies are increasingly granting reimbursements of lump sum amounts to employees for costs paid by the employees for the account of their employer. It concerns small costs which can difficultly be justified through invoices.

Such a lump sum reimbursement of costs is very interesting from a tax (and generally also social security) point of view, since it does not constitute salary and thus taxable income on behalf of the beneficiary. The company will be obliged to report part of the allowances granted in ‘Disallowed Expenses’, depending on the nature of the reimbursements made (e.g. representation costs are deductible for 50%).

The reimbursement of lump sum allowances ‘proper to the employer’ varies according to the exercised functions, and is mostly situated between 80 and 250 euro per month. The majority of the costs concern cost of a home office, small representation, cost of receptions at home, waiting times at airports, parking meters, car-wash, gifts, private telephone and internet used for business reasons, ….

Of course, the company should be able to justify which kind of costs will be reimbursed on a forfaitary basis, and why some functions in the company justify such reimbursements.

Recently it has appeared that tax inspectors tend to refuse or challenge lump sum reimbursements at the occasion of a tax audit, when no formal request has been filed with the Ministry of Finance to obtain an agreement thereon.

The formal request mentions a.o. the following: nature of activities and company structure, justification of reimbursement of costs incurred by some categories, nature of costs reimbursed, name and address of beneficiaries, detail of costs rejected as Disallowed Items. Moreover each beneficiary will need to provide some evidence that he actually incurred these costs proper to the employer.

Once the formal agreement is granted, it will normally be valid for a period of three years, and it can then be renewed rather easily. The agreement will also form a guideline for past lump sum reimbursements granted.

16 June 2010

Bruno Gernay