In sectors with annual wage indexation, there is a discrepancy between the (non-indexed) wages allocated in 2022 — tax basis for the holiday pay accrual — and the (indexed) holiday pay actually to be paid in 2023. In this context, is it advisable to still include the index in the holiday pay provision at the year-end closing?
Two indexation systems
In general, there are two systems for adjusting wages to the cost of living. In the first system, wages are automatically adjusted when the central index is exceeded. This is the case, for example, for the wages of healthcare and government staff. In the second system, wages are only indexed periodically. For employees in the food industry, for example, or the 500,000 white-collar employees in Joint Committee 200, wages are increased annually (January 2023) to adjust them to inflation.
Discrepancy between holiday pay accrual and payment
The double holiday pay, which is usually paid in May or June 2023, will be calculated on the (indexed) gross salary applicable at that time. In order to anticipate these costs, in accordance with accounting law (Art. 3:11 Royal Decree/Code of Companies and Associations), a debt of up to one year (account 456 holiday pay) must be booked at the end of the financial year 2022. However, this provision is only tax deductible if it is recorded within certain limits. As in previous years, the tax authorities, in consultation with the FEB, have recently laid down the rules that will apply (see circular 2023/C/22 of 21/2/2023). For white-collar employees, a deductible provision of 18.20% of the fixed and variable remuneration allocated in 2022 (excl. end-of-year bonus, 13th month bonus and double holiday pay) can be recorded. For blue-collar workers, this is 10.27% of 108% of the gross remuneration.
In sectors where the wage indexation has only came into force since January 2023, the question arises as to whether or not the holiday pay accrual – which is based on the non-indexed wages of 2022 – should be adjusted to inflation.
Principles of regular accounting
Article 3:11 of the Royal Decree/Code of Companies and Associations, prescribes that at the end of the financial year, one must record “…the remuneration, benefits and other social benefits that will be paid in the course of a subsequent financial year for services performed during the financial year or during previous financial years”.
The additional costs associated with the indexation effect must therefore be included as holiday pay provision at the end of the financial year. Note that this additional cost must be based on objective assessment criteria and should include the best estimate of the costs that are likely to be paid.
In this context, the ICCI (Information Centre for Registered Auditors) drew up an opinion in mid-January 2023 in which auditors are advised to increase the holiday pay provision with the indexation as it is known at the end of the year.
Additional provision also tax-free?
For the tax authorities, provisions are regarded as reserves, which in principle form part of the taxable reserves (Article 25, 5° of the Belgian Income Tax Code 1992). They are only exempt from tax under certain conditions. In this respect, the administrative comment (57/18) clarifies that the holiday pay accounted for during a financial year, which is still to be paid, is only regarded as professional expenses to the extent that it corresponds to the minimum amount of the holiday pay that will have to be borne by the undertaking at a later date. This “minimum amount” (read percentage in accordance with Com. 57/23) is communicated annually via a circular letter (see above).
Therefore, if a company is of the opinion that it must create a supplementary holiday pay accrual to cover the additional costs of the wage indexation, this can only be recorded if all tax conditions have also been met (see Article 48 Belgian Income Tax Code 1992). In particular, the need to clearly define the foreseeable costs is important in this regard. In practice, this will therefore have to be done on the basis of a detailed (individual) calculation per employee, based on known and established data at the moment at which the provision is recorded.
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