The recent NSSO exemption for the remuneration of copyrights continues to cause turmoil, including with respect to wage conversion.

In an individual position, the NSSO (somewhat paradoxically) favors a stricter interpretation - read: the NSSO will more quickly rule that there is wage conversion. Consequence: the conditions of the NSSO decision in this respect must be complied with.

The NSSO seems to favor a contra legem interpretation regarding the maximum turnover amount. The NSSO's starting point seems noble, but that is not what the NSSO decree states.

Finally, it is an open question whether the maximum turnover amount is an absolute or a relative figure. In our opinion, it should be a relative figure because using an absolute maximum turnoverable amount can/will lead to a lot of strange situations.

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Brief situation sketch

With the Royal Decree of April 7, 2023, a new exemption was included in the NSSO decree, namely the copyright remuneration. Under certain conditions and up to 30% of the total gross salary, the copyright remuneration can be exempted from employer and employee social security contributions and this retroactively as of January 1, 2023.

Of course, one cannot simply reduce gross wages and, by way of wage optimization, grant the difference in a compensation royalty (= wage conversion). That would be a bit too easy. Of course, in order to treat wage agreements existing before January 1, 2023 in the same way as for new employment contracts, an exception is made to the prohibition of wage conversion.

The question now arises as to what exactly wage conversion is, the importance of knowing whether it is wage conversion or not, and the consequences.

With the latest NSSO administrative instructions dated Oct. 2, 2023(https://www.socialsecurity.be/employer/instructions/dmfa/nl/latest/intermediates#vergoedingen-voortvloeiend-uit-de-overdracht-of-verlening-van-een-licentie-van-auteursrechten-en-naburige-rechten-in-het-domein-van-de-kunsten-aanvullende-informatie-02-10-2023), there is once again some clarification regarding the application of wage conversion and the NSSO exemption for copyright compensation.

The NSSO has also recently taken a position in an individual position regarding when one speaks of wage conversion.

Nevertheless, more new questions have arisen than answers.

We will go into more detail on all of this in this blog post.

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Why is it important to know if there is wage conversion?

The basic condition for the application of art. 19, § 2, 26°, paragraph 3 NSSO implementation decree is that the remuneration for the transfer of copyrights must be subject to wage conversion. Read: part of the gross remuneration must be exchanged (the NSSO implementation decree speaks of replaced or converted) for a copyright remuneration. Conversely, if the copyright remuneration is not the subject of a wage conversion, the conditions of art. 19, 26°, paragraph 3 NSSO implementation decree do not have to be complied with.

Incidentally, whether there is wage conversion has a different impact on employment contracts (including wage conversion) concluded before Jan. 1, 2023 and employment contracts concluded from Jan. 1, 2023.

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For employment contracts before Jan. 1, 2023

First and foremost, the fact that the royalties have been converted from wages does not necessarily have an impact on the NSSO exemption. It will be possible to exempt the royalties from both employee and employer social security contributions retroactively as of January 1, 2023.

However, the employer must make a declaration to the NSSO of the wage conversion before the end of 2023. In practice, this will be recorded by the employer's social secretariat.

In addition, two further conditions are imposed, namely:

• copyright transfer fees granted to the employee before 2023 were correctly reported in the employee's personal income taxes;
• the exempt amount is limited to the amount that was declared, or, in 2022, or - if this amount would be higher - the average of the years 2018 through 2021. This is what we will discuss further.

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For employment contracts as of Jan. 1, 2023

The principle is that wage conversion is prohibited. Payments for the transfer of copyrights that are subject to wage conversion are in principle considered wages, on which employee and employer social security contributions are due.

Royalties royalties that are subject to wage conversion can only be exempt from NSSO if a number of cumulative conditions are met. The conditions only mention movable copyright income up to and including tax year 2022. Read: remunerations copyrights granted for the first time from January 1, 2023 are not covered.

Suppose one has entered into an employment contract with a new employee on January 2, 2023 where the royalties are subject to wage conversion. In this case, one will not be able to exempt the copyright remuneration from NSSO as of January 1, 2023.

Since compensation royalties were only exempted with the RD of April 7, 2023, employers and employees could not possibly have foreseen this - which obviously makes this case problematic. However, an employee and employer who entered into the same employment contract 3 days earlier can claim the NSSO exemption.

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What is wage conversion?

If one reads the NSSO implementation decree, one will not find the term "wage conversion". Article 19, § 2, 26°, paragraph 3 NSSO implementation decree does not speak of conversion, but of "conversion or replacement of wages, premiums, benefits in kind or any other benefit or supplement thereto, whether or not liable to social security contributions."

This is reminiscent of the provisions in the NSSO decree on meal vouchers and eco vouchers, where the notions of conversion and replacement are also used. However, the NSSO implementation decree does not define these notions. Also in legal doctrine very little, if anything, has been written about what constitutes conversion and replacement of wages. The question whether conversion and substitution should be regarded as synonyms or as two separate concepts has not yet been investigated.

In doing so, we must first and foremost ask whether it is pertinent to examine what the notions of "substitution" and "conversion" mean. For the first question we must ask is not whether there is a conversion or substitution of wages, but rather whether there was a (prior) right to wages at all. After all, if there was no prior right to wages, there cannot be any conversion or substitution of wages either.

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Right to wages as a starting point

A conversion or substitution of wages occurs when an employee exchanges a portion of his or her wages for an alternative benefit. The question of whether something is a conversion or substitution is relevant only after it has been determined that it is effectively "wages.

For the sake of completeness, article 19, § 2, 26°, paragraph 3 NSSO decree speaks not only of wages, but also of premiums, benefits in kind or any other benefit or supplement thereto. In our opinion, all these terms fall under the wage concept. We believe that the inclusion of all these terms in the NSSO decree is due to the desire to give the wage concept the widest possible scope.

The term "wages," referred to in article 19, § 2, 26°, paragraph 3 NSSO decree, must be defined according to article 2 of the Wage Protection Act. This article defines wages as: the wages in money or benefits assessable in money to which the employee is entitled pursuant to his employment at the expense of the employer (own emphasis added).

Thus, wages only exist when the employee has a right against his employer. Conversely, when there is no prior right to wages, there can be no conversion or substitution of wages either. In practice, therefore, it will often be irrelevant to know exactly what is to be understood by conversion or substitution.

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Applied to copyright fees in practice

The employment contract will be the preeminent means of proof to determine whether or not there has been wage conversion. In practice, for copyright transfer compensation, it is often stipulated that gross pay equals x and that copyright transfer compensation is part of it. In fact, from tax practice, the copyright remuneration is determined on the basis of the financial envelope calculated on the basis of the gross salary, and the tax authorities accept such contractual provisions.

The question now is whether this should be considered a wage conversion or not, and whether or not the conditions of art. 19, § 2, 26°, paragraph 3 NSSO implementation decree should be applied. Or from our approach: was there a prior right to wages that was subsequently converted into royalties?

When such a clause appears in the initial employment contract, in our opinion there is no wage conversion. The employee was never entitled to the total gross salary plus the copyright remuneration, but only to the gross salary minus the copyright remuneration plus the copyright remuneration.

Employment contracts are generally somewhat ambiguous in this regard. That's because before 2023, it was not necessary to clearly stipulate that the copyright allowance is not included in gross pay, but is in addition to gross pay. In most cases, this made no difference at all for the purposes of the NSSO and vacation laws.

Of course, with the recent NSSO exemption for copyright remuneration, this is changing. In any case, art. 19, § 2, 26°, paragraph 3 NSSO implementation decree does not apply here. The company can apply the NSSO exemption for this employee as of January 1, 2023 without filing a return with the NSSO. We have submitted this case to the NSSO (see below).

When such a clause does not appear in the initial employment contract, there is wage conversion. For example, it is initially agreed that the gross monthly salary is EUR 3 000. When afterwards a gross monthly salary of EUR 2 500 is agreed and a copyright fee of EUR 500 per month is paid, there will in principle be salary conversion. After all, there was a prior right to wages.

The fact that no payment had yet taken place (yet) or that the annex to the employment contract providing for it was signed only minutes after the initial employment contract is irrelevant. In fact, a right to remuneration arose prior to this, and thus there is wage conversion. However, the copyright remuneration can be exempt from NSSO, provided the conditions of art. 19, § 2, 26°, paragraph 3 NSSO implementing decree are met.

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Position of the NSSO

Suppose it is clear from the beginning of the employment contract that the employee would never be entitled to the total gross remuneration plus the copyright remuneration, but only to the gross remuneration minus the copyright remuneration plus the copyright remuneration. The sum results in the total gross pay, subject to NSSO.

Since there was no entitlement for the employee to the total gross wages, there can be no wage conversion either.

Not so according to the NSSO. Without arguing too much, the NSSO indicated that it could not follow this reasoning and that in such a case (and thus a large number of cases) there is indeed wage conversion.

Thus, although the NSSO does not expressly state this in its individual position, it believes that there was a prior right to the total gross salary. That goes pretty far. For the only source of law from which a right to wages could arise is an oral contract of employment or a unilateral promise by the employer from which the employee could draw rights. In itself, this is possible. Only we have to wonder how the NSSO will be able to prove that there was a prior right to wages that does not follow from the written employment contract, especially since the employee never directed any other claims to the employer.

The NSSO will therefore be strict in assessing whether the conditions are met to enjoy an exemption from NSSO for the remuneration of copyrights that were the subject of a wage conversion. This makes sense because this is an exception to the principle that such wage conversions cannot be exempt from NSSO. And exceptions should be interpreted narrowly. Here we note that the NSSO has taken a stricter position than was the case in the past. Previously, the NSSO ruled that there could only be wage conversion when a payment had already been made. This leads to the paradoxical consequence that although the government has just expanded the scope of the NSSO exemptions, there will be a stricter position assessment in determining whether employers and employees are entitled to this exemption than before.

Now, as stated above, even when there is wage conversion, one can still enjoy the exemption from NSSO as of January 1, 2023. Only one will have to comply with the conditions of article 19, § 2, 26°, paragraph 3 NSSO decree. This means that one must (a) file a return to the NSSO of the wage conversion and (b) respect a maximum exempt turnover amount.

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The maximum turnover amount

Article 19, § 2, 26°, paragraph 3 NSSO decree explicitly states that the amount of the remuneration royalties that were the subject of wage conversion can only be exempted up to the lowest of the following amounts:

• for the year 2022: the amount declared in the personal income tax or the difference between that amount and the wage in return for labor (read: the total wage minus the amount of copyright royalties);
• in case of regularization, the amount for 2021, 2020, 2019 or 2018: the amount declared in the person tax or the difference between that amount and the salary in return for labor (read: the total salary less the amount of royalties).

In its administrative instructions, the NSSO states that this provision should be interpreted to mean that the highest of the following amounts should be applied: "the amount calculated based on 2022 (or the last year in which copyrights were granted) or the average of the last 5 years."

Although the intention of the NSSO is noble - namely, to avoid an excessively different amount from the last year influencing the situation too strongly - one can hardly fail to read in this an interpretation contra legem. That the administration doesn't actually know either gives yet another thought to the quality of these regulations. But again: nothing new under the sun.

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Outstanding questions and concerns

Employees employed as of Jan. 1, 2023, but prior to the advent of the April 7, 2023 RD

As noted above, when one enters into an employment contract with a new employee on January 2, 2023 where the compensation royalties are subject to wage conversion, one will not be able to exempt the compensation royalties from NSSO as of January 1, 2023.

Since copyright compensation was not exempted until the April 7, 2023 RD, employers and employees could not possibly have foreseen this. That that makes this case problematic needs no further explanation. However, an employee and employer who entered into the same employment contract 3 days earlier (i.e., in 2022) with the same foreknowledge can claim the NSSO exemption.

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Populations before Jan. 1, 2023 vs. populations as of Jan. 1, 2023

Let's assume that copyright compensation was the highest amount before 2022. That will be true for most employers/employees as well, since the royalties portion of the royalty is a percentage of gross pay that normally increases (via promotions, wage indexing and other pay increases) over the years.

The NSSO decree caps the copyright remuneration that is the subject of wage conversion at a maximum convertible amount.

The question now arises whether this maximum turnover amount should be interpreted as an absolute amount or a relative amount (i.e., a percentage calculated on the employee's gross wages).

If we assume that it is an absolute amount, then many companies will inadvertently distinguish between the old population whose compensation royalties are capped to a certain absolute figure and the new population employed since Jan. 1, 2023 whose compensation royalties continue to increase year after year as a function of rising gross wages.

This case is also currently before the NSSO.

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What about employees employed during 2022?

And how should we deal with employees who are not employed until Dec. 1, 2022, and were paid royalties in 2022?

Again, the NSSO decision speaks of a maximum turnover amount, which is an annual amount.

So should we take that amount as an absolute figure for 2022? Or should we prorate that amount to a full-time position over a full calendar year?

It seems obvious to us that this amount should be prorated to a full calendar year, which amounts to using a relative amount rather than an absolute amount.

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What about part-time workers with increased performance in 2023?

And what about part-time employees who worked half-time in 2022, received half-time compensation royalties, but have been working full-time since Jan. 1, 2023?

If we assume an absolute maximum turnover amount, we believe there will be an impermissible distinction between full-time employees and employees who previously worked part-time. Given the regulations on part-time employment, there may then be discrimination.

Again, it seems obvious to us to use a relative amount, not an absolute amount when determining the maximum revenueable amount.

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What action should you take now as an employer?

If there is a wage conversion, take the necessary steps to report this to the NSSO. Your social secretariat will assist you with this. If you do not have a social secretariat, you can declare this to the NSSO yourself.

For the future, it is best to make sure your employment contracts are drafted so that there is no appearance of wage conversion, so that you can exempt compensation royalties from NSSO.