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tax treatment of non-resident director

Payments that are subject to withholding tax

Introduction to Withholding tax in Singapore

Under the Singapore Income Tax Act, a Singapore entity or individual making payment(s) of a specified nature to a non-resident company or individual (known as payee) is required to withhold a percentage of that payment and remit the amount withheld (known as ‘Withholding Tax’) to the IRAS. Withholding tax is only applicable to non-resident’s income generated or sourced in Singapore.

Who is a non-resident?

In Singapore, the tax residency of a company is determined by the place in which the business is controlled and managed. A key factor in determining where the control and management is exercised is the location where the company’s Board of Directors meet to make strategic decisions.

A company is considered a tax resident in Singapore when the control and management of the company is exercised in Singapore. As such, a Singapore branch office of a foreign company is considered as a non-resident as its control and management is with its parent foreign company. It should also be noted that the place of incorporation does not necessarily indicate the company’s tax residency.

Meanwhile, a non-resident individual is an individual who is employed or physically present in Singapore for less than 183 days in a calendar year. For individuals, withholding tax is only required for non-resident professionals, non-resident public entertainers and non-resident directors.

A foreign professional is an individual exercising profession or vocation independently under a contract for service and not as an employee of a company. Examples of a foreign professional are as follows:

  • A foreign expert invited by government bodies, statutory boards, or private organisations to impart their technical expertise in Singapore;
  • A foreign speaker or academic conducting seminars or workshops;
  • Queen’s Counsel;
  • Consultant, trainer, coach; and
  • An individual who operates through a foreign firm

A public entertainer includes:

  • Stage, radio or television artiste and musician; and
  • Athlete (sportsman in any sporting events or tournaments)

However, foreign individuals who work behind the scenes e.g. crew, choreographers, directors in the entertainment scene or horse trainers, coaches, personal trainers for sporting events are not considered as public entertainers.

A foreign professional/public entertainer is considered a non-resident when he/she is in Singapore for less than 183 days in a calendar year.

Details on withholding tax for non-resident directors are covered in another article here.

What is subject to withholding tax?

Withholding tax only applies to payments of specified nature and this is listed under Section 45 of the Singapore Income Tax Act. The rate of withholding tax depends on the nature of the payment. However, in cases where Singapore has entered into an Avoidance of Double Taxation Agreement (DTA) with the country where the non-resident resides, the rates specified in the DTAs of the respective countries would apply and the tax rate may be lower.

The types of payment and the applicable withholding tax rates can be referred in details here.

When to file and pay withholding tax?

The e-filing and payment of withholding tax are due on 15th of the second month from the date of payment to the non-resident. The date of payment is defined as the earliest of the following dates:

  1. When the payment is due and payable based on the agreement or contract, or the date of the invoice in the absence of any agreement or contract.
  2. When payment is credited to the account of the non-resident or any other account(s) designated by the non-resident
  3. The date of actual payment

Late penalty fees will be imposed when payment and filing are not received by the due date.

If the tax remains unpaid by the due date,

  • A penalty of 5% will be imposed on the unpaid tax
  • An additional penalty of 1% will be imposed if the tax remains unpaid within 30 days from the due date. This is imposed for each completed month that the tax remains unpaid, subject to a maximum penalty of 15%.

How to file?

From 1 July 2016, the withholding tax form can only be filed electronically via S45 e-Services. To access this e-Service, the payer must log in to myTax portal using CorpPass. It is an offence under Section 94(2) of the Income Tax Act if withholding tax is not filed electronically from 1 July 2016.

When e-filing, the payer must select the appropriate nature of payment.

Multiple payments for a single engagement

If a payer makes multiple payments within a 60 day period to the same non-resident professional or public entertainer in respect of the same engagement, the payer can consolidate the payments into one e-filing and payment to the IRAS. The due date for e-filing and payment would be 15th of the second month from the date of the last payment to the non-resident.

Claiming relief/exemption under the Avoidance of Double Taxation Agreement (DTA)

If the non-resident is residing in one of the countries which Singapore has entered a DTA with, the rates as specified in the agreement will be applicable instead of the current withholding tax rates. At at 1 January 2019, Singapore has 85 comprehensive ratified tax treaties.

Non-resident company may use the S45 Double Taxation Relief Tax Rate Calculator for Companies to determine if it is eligible for Double Taxation Relief/Exemption and find the applicable tax rate under the DTA.

Where tax treaty applies, the payer will have to

  • Check the “Double Taxation Relief” box during e-filing.
  • Obtain the original Certificate of Residence (COR) certified by the foreign tax authority from the non-resident payee.
  • Submit the COR to IRAS by 31 March of the following year if the claim is for current year or within 3 months from the date that the withholding tax is e-filed if the claim is for preceding years.

On the other hand, non-resident professional may use the Tax Treaty Calculator for Non-Resident Professionals (Form IR586) to determine if he/she is eligible for tax treaty exemption.

Where tax treaty applies, the payer will have to

  • Check the “Claim for relief under Avoidance of Double Taxation Agreement (DTA)” box during e-filing.
  • Obtain a signed copy of Form IR586 from the non-resident professional. This is not required to be submitted to the IRAS unless requested. All documents and records are to be retained for 5 years.

Reference

IRAS page on types of Payment & the Applicable Withholding Tax Rates 

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Tax treatment on Remuneration of Non-Resident Directors

As per the Singapore Company Act, a company incorporated in Singapore is required to have at least one resident director. While it is compulsory for a company incorporated in Singapore to have a resident director, a company can also appoint non-resident directors to oversee the overall functioning of the company. The company may decide to compensate the non-resident directors for the services performed. Thus it is important to understand the tax obligations in relation to the compensation made to the non-resident directors and to ensure compliance with the regulations.

For tax purposes, a company director is a member of the board of directors of a company. A company director who is physically present in Singapore for less than 183 days in the year preceding the Year of Assessment (YA) is considered a non-resident director.

Director’s remuneration subject to tax includes both cash and non-cash payments:

  • salary;
  • bonus;
  • director’s fees;
  • accommodation provided and
  • gains from stock options or other share ownership plans etc.

From 1 January 2016 onwards, directors travelling into Singapore for business purpose will not be taxed on the following benefits-in-kind:

  • Airfare paid by employers for directors to attend board meetings
  • Accommodation
  • Travelling and entertainment expenses incurred for business purposes
  • Per diem allowance at or below the acceptable rate of S$141 per day.

A non-resident director may receive remuneration in the following ways:

  • In the capacity as a Board Director;
  • In the capacities as a Board and Executive Director; or
  • In the form of gains from exercising of stock options or vesting of stock awards.

Depending on the capacity in which he receives remuneration, the tax obligations applicable are different.

Capacity as a Board Director

A Singapore tax-resident company paying remuneration to a non-resident director is required to withhold 22% of that payment with effect from YA 2017. The amount withheld (also known as ‘Withholding Tax’) has to be paid to IRAS. This is regardless where the board meeting was held or whether the non-resident director was physically working in Singapore.

The tax resident company is required to file the Form IR37 and pay the withholding tax to the IRAS by 15th of the second month from the date of payment of the director’s remuneration. Thereafter, the IRAS will issue a Confirmation of Payment (CP) to the company.

The non-resident director does not have to file a tax return as the company has withheld tax at source.

Capacity as a Board and Executive Director 

A company can appoint a non-resident director as an executive director (e.g. Chief Executive Officer, Managing Director etc.) to run the daily business operations. Remuneration received in the capacity as an executive director will be treated as employment income and not subject to withholding tax.

Should an individual receive remuneration in the capacity as a non-resident director and executive director, only the income derived in the capacity of a non-resident director is subject to withholding tax as detailed above. In addition, the company should prepare a Form IR8A to report the director’s remuneration and a separate Form IR8A to report the employment income received in the capacity as an executive director. The employer must provide copies of the Form IR8As to the director for tax filing purpose.

The non-resident director in turn has to file a tax return declaring the employment income.

Gains from exercising of stock options or vesting of stock awards

For non-resident directors receiving gains from exercising of stock options (ESOP) or vesting of stock awards (ESOW), the tax resident company should file the Form IR21A to report the gains from ESOP/ESOW within 30 days from the date of exercise, assignment, release or acquisition of the shares. A tax bill will be issued to the non-resident director for tax payment.

Tax Clearance 

When a non-Singapore citizen employee ceases employment as an executive director or leaves the country for a period exceeding three months, the employer must seek tax clearance and ensure that the employee settles all his outstanding taxes.

Conclusion

Many foreign companies are setting up operations in Singapore with foreign individuals as company directors. As the tax obligations differ for non-resident directors and executive directors, it is important for companies to distinguish the role(s) of the foreign individual i.e. whether the individual is a board director, executive director or both, so as to ensure compliance with the regulations.


References

IRAS page on Remuneration of Non-Resident Directors
IRAS page on Tax for non-resident directors 

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