Taxation of Non-Resident Directors
Payments made to a director of a company who is not a resident of Singapore are subject to withholding as described in this article. Singapore levies various taxes on an individual according to his or her tax residency status in the country. The country determines this status on the basis of the number of days an individual resides in Singapore in a calendar year.
On incorporating a Singapore company, the law mandates the appointment of at least one resident director on the board of the company. While it is mandatory for companies to have a resident director on the board of directors of the company, a company can also appoint non-resident directors. The directors play an important role in the overall functioning of the company. These non-resident directors can receive payment in the form of fees from the company. When setting up and operating a company in Singapore it is important to understand the various compliances and regulations applicable as they relate to the directors. The Inland Revenue Authority of Singapore (IRAS) has put forth certain rules and guidelines pertaining to payments made by the company to non-resident directors. This article will highlight the treatment of taxable income of non-resident directors, the tax rates applicable, the tax returns to be filed annually etc.
Non-Resident Director
A non-resident director of a company incorporated in Singapore is a director who is physically present in the country for any period totalling less than 183 days in a year.
What is Taxed?
Taxable income of a non-resident director is the income of the director that is subject to tax. A non-resident director’s taxable income is the remuneration in the form of cash as well as non-cash payments made by the company which includes the following:
Salary
Bonus
Director’s Fees
Accommodation
Gains from stock options or any other share ownership plan.
From January 1, 2016 directors traveling to Singapore for business purpose will not be taxed on the following types of non-cash compensation:
Accommodation
Traveling and entertainment for business purpose
Airfare paid by the employers for the directors to attend any board meeting.
Per Diem allowance at the acceptable rate of $141 per day.
Note
Per Diem allowance is the daily allowance given to an employee on an overseas trip for business purpose. The acceptable rate of $141 per day is only used to ascertain the taxable income; it is not required to use this rate for other aspects of the company.
Capacity and Remuneration
A non-resident director receives remuneration either:
In his capacity as a Board Director or
In his capacity as a Board and Executive Director or
In the form of gains from stock options or stock awards.
The sections below state the taxes applicable on the remuneration of the non-resident directors for each of the above capacities and the tax returns to be filed.
Capacity as a Board Director
A non-resident director appointed on the board of a Singapore company may receive remuneration for services performed. On payment of the remuneration to the non-resident director in the capacity of a board director, the employer must withhold tax at the rate of 20% of the director’s remuneration. From the Assessment Year 2017, the withholding tax rate on director’s remuneration will be 22%.
Note that a tax treaty between the director’s country of residence and Singapore may prescribe a reduced withholding tax rate in some cases.
Form to be Filed
The employer who withholds the tax on the director’s remuneration has to file Form IR37. The director does not have to file a tax return for the withholding tax.
Withholding Tax Payment
The employer has to pay the withholding tax amount by the 15th of the second month from the date when the director’s remuneration was paid. On payment, a letter of Confirmation of Payment (COP) will be issued to the employer.
Capacity as a Board and Executive Director
A company can appoint a non-resident director as an executive director of the company where the director is involved in running the daily activities and business operations of the company. To function in this capacity, the company can appoint the non-resident director as the Chairman, Managing Director, Chief Executive Officer etc. Remuneration received in such capacity will be treated as employment income and therefore subject to employment income tax treatment.
Form to be Filed
The employer has to file Form IR8A reporting both the employment income of the non-resident in his capacity as an executive director. The employer must provide copy of Form IR8A to the director for tax filing purpose.
The non-resident director in turn has to file a tax return declaring the employment income. Singapore tax authority will then calculate the applicable tax and send a tax assessment letter to the director.
Gains from Stock Options and Stock Awards
The profit or gains from the exercise of stock options or vesting of stock awards is subject to tax. A non-resident director who derives gains from stock options or awards has to declare the gains in the tax form for the assessment year under “employment income”.
Form to be Filed
The employer has to file Form IR21A stating the gains either from stock options or stock awards. This form has to be filed within a period of 30 days from the date of exercise, assignment, release or acquisition of the shares.
Tax Clearance
Every employer who appoints a non-resident executive director must seek tax clearance when the employee ceases employment as an executive director. When any employee who is a non-resident Singapore citizen leaves the country for a period exceeding three months, the employer must ensure that the employee pays all his taxes. This process is known as Tax Clearance.
Conclusion
Because of the numerous advantages, a large number of global entrepreneurs and foreign companies setup their operations in Singapore every year. In such cases, very often one or more of the company directors are non-resident individuals. This article provides a general guidance for such individuals on taxes applicable to them. To ensure that the company as well as non-resident directors are compliant with the deductions and payments of applicable taxes, you should seek the assistance of a qualified Singapore corporate service provider.
FAQs
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An individual’s tax liability depends on the tax residency status. An individual is a “tax resident” in Singapore if he or she stays or works in the country:
For a period of at least 183 days on an aggregate in a calendar year or
For a period of at least 183 days continuously over two years (This is applicable to foreign employees but excludes public entertainers, company directors and professionals) of
Continually for a period of three consecutive years.
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Stock options, commonly known as Employee Share Option (ESOP) plans give employees of the company a right to purchase shares in the company at a predetermined price. The gains or profit from these stock options are taxable.
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Stock awards are a part of Employee Share Ownership (ESOW) plans of a company where the employee can own or purchase shares of the company or its parent company. The gains or profits from stock awards or any ESOW plan are taxable.
