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 operation of the company. As the company may decide to compensate the non-resident directors for the services performed, it is important to understand the tax obligations in relation to the compensation made to the non-resident directors so as 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 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 IR8A Forms 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
As many foreign companies are setting up operations in Singapore with foreign individuals as company 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