Director’s remuneration

What it means

Director’s remuneration is what the managing director of a limited liability company receives for holding office. Its amount and terms are set by a directorship agreement approved by the general meeting or directly by a shareholders’ resolution. A director may also serve without pay.

For tax, the remuneration is treated as employment income, like wages. The company withholds tax advances and pays contributions. For a director, however, the scope of insurance in some funds differs from an ordinary employee’s, particularly with irregular income.

Remuneration for holding office must be distinguished from wages under an employment contract, if the director also does other work for the company, from a profit share paid as a board profit share and from dividends received as a shareholder. Each is taxed and treated for contributions differently.

How it works in practice

When setting the pay of a director who is also a shareholder, we compare the overall burden of the different routes with the client: remuneration, salary, dividends and combinations. Dividends carry a different rate and contribution treatment, but they are paid only from post-tax profit and only once a year.

Remuneration needs a legal basis, meaning a written agreement or a general meeting resolution. Without it the tax office may not accept the expense, and the Social Insurance Agency may assess the insurance differently from what the company expected.

In payroll, a director receiving remuneration is registered with the insurers as a particular category of insured person and reported under the corresponding code in the monthly statements. When the amount or frequency changes, it should be checked whether their insurance status changes too.

What to watch out for

The most common mistake is paying the director money “on account” without a resolution, a contract or tax. At an audit such withdrawals are treated as a hidden profit distribution or a loan, with tax consequences for both company and director.

The second risk is changing remuneration retrospectively. The general meeting cannot raise pay for a past period so that it becomes a deductible expense of a year already closed. Decisions on remuneration should be made in advance.