In the dynamic landscape of corporate governance, the role of directors is pivotal. Their expertise, decisions, and guidance shape the trajectory of businesses. In Singapore, a global business hub known for its robust regulatory framework and favourable business environment, the remuneration of directors, particularly non-resident directors, is a topic of significance. In this blog, we delve into the intricacies of remuneration for a non-resident director and how it is taxed in Singapore.
Understanding Non-Resident Directors
Non-resident directors, as the term suggests, are individuals who hold positions on the board of directors of a Singaporean company but do not maintain permanent residency in Singapore. Their status as non-residents is determined primarily by their physical presence in the country over a specific period, typically the year preceding the Year of Assessment (YA) for tax purposes.
According to Singapore’s tax laws, a director is classified as a non-resident if they are physically present in Singapore for fewer than 183 days in the year preceding the YA. This criterion is crucial for determining their tax liabilities and residency status in Singapore. If a director meets this threshold, they are considered a non-resident for tax purposes, regardless of their citizenship or nationality.
Despite not being permanent residents, non-resident directors play a vital role in the governance and strategic direction of Singaporean companies. Their inclusion on the board brings a diverse range of perspectives, expertise, and international networks to the table, thereby enriching the decision-making process.
Types of Remuneration for a Non-Resident Director
Remuneration for directors encompasses various forms of compensation, both monetary and non-monetary, received for their services rendered. In Singapore, the Inland Revenue Authority of Singapore (IRAS) governs the taxation of director’s remuneration, ensuring compliance with tax regulations and providing clarity on taxable and non-taxable components. Here’s a detailed elaboration on the taxable and non-taxable elements of director’s remuneration:
Taxable Income
- Salary: Any fixed or variable payments designated as salary to directors are considered taxable income. This includes regular payments made to directors for their executive roles within the company.
- Bonus: Additional payments made to directors as performance bonuses are subject to taxation. These bonuses may be tied to individual or company performance targets.
- Director’s Fees: Payments specifically designated as director’s fees, whether fixed or variable, are taxable. These fees are compensation for the director’s service on the board and may be determined by the company’s constitution or board resolution.
- Accommodation Provided: Any accommodation provided to directors by the employer is considered a taxable benefit unless it falls under specific exemptions (discussed later).
- Gains from the Exercise of Stock Options: If directors receive stock options as part of their remuneration package and subsequently exercise these options, any resulting gains are subject to taxation.
Non-Taxable Income
- Airfare for Board Meetings: Airfare paid by employers to facilitate directors’ attendance at board meetings is considered a concession and is not taxable. This exemption aims to encourage director participation in board meetings without imposing additional tax burdens.
- Accommodation: While accommodation provided to directors is generally taxable, specific exemptions may apply. For instance, accommodation provided for business-related purposes may be exempt from taxation.
- Travelling and Entertainment Expenses: Expenses incurred for business-related travel and entertainment purposes are typically not taxable. However, these expenses must be genuinely incurred for business purposes to qualify for exemption.
- Per Diem Allowances: To streamline the taxation of per diem allowances for directors travelling into Singapore for business purposes, IRAS has introduced acceptable rates for such allowances. Per diem allowances provided to directors are not taxable unless they exceed the acceptable rate determined by IRAS.
Taxation of Remuneration for a Non-Resident Director
The taxation of remuneration for non-resident directors in Singapore is governed by the Inland Revenue Authority of Singapore (IRAS). Here’s how it typically works:
Director’s Fees
Director’s fees earned by non-resident directors for services performed in Singapore are liable to withholding tax. The current prevailing withholding tax rate stands at 24% unless mitigated under an applicable tax treaty.
Employers are required to e-file via myTax Portal and remit the withholding tax by the 15th of the second month following the date of payment of the director’s remuneration. Upon payment, a Confirmation of Payment (CP) letter will be issued to the employer. As the tax has been withheld at source and e-filed by the employer, the director is relieved from the obligation of filing a tax return.
Salary Received as an Executive Director
As a non-resident director receiving employment income as an executive director from a Singapore tax resident company, various obligations and procedures must be followed. Here’s a breakdown of the remuneration and corresponding employer obligations:
Employer’s Obligations
- Withhold Tax:
- When a director receives a salary as managing director withholding tax is not applicable.
- Prepare Form IR8A and Seek Tax Clearance:
- Prepare Form IR8A to report for salary received as a managing director.
- Provide the Form IR8A to the employee by 1 March of the following year for their tax filing. If tax has been withheld on the director’s remuneration/fees, the ‘S45 indicator’ on the IR8A screen must be checked for e-submission.
- Seek tax clearance to settle the income tax when the employee decides to cease employment as an executive director.
Adhering to these obligations ensures compliance with Singapore’s tax regulations and facilitates the smooth management of employment income for non-resident directors.
Director’s Obligation
- If the director is physically present in Singapore for less than 183 days in a calendar year, the employment income received as a managing director should be declared in the tax return for the Year of Assessment (YA) if the employer is not under the auto-inclusion scheme. Tax should be paid upon receipt of the tax bill. The director does not need to report the director’s remuneration received as a board director since the employer is responsible for accounting for the withholding tax on payments made to them as a non-resident.
- If the director’s physical presence in Singapore is at least 183 days in a calendar year, the employment income should be declared in the tax return for YA if the employer is not under the auto-inclusion scheme. The declaration should include the salary as well as the director’s fees. Furnish the following information to IRAS:
- Tax reference number
- A schedule of physical presence demonstrating that the period of stay in Singapore is at least 183 days in the calendar year
- Copies of the Confirmation of Payment (CP) letter on the withholding tax
Tax should be paid upon receipt of the tax bill. It’s important to ensure there are no outstanding tax dues when deciding to cease employment with the employer.
Gains from ESOP/ESOW
When a non-resident director receives gains from exercising stock options (ESOP) or the vesting of stock awards (ESOW) in a company that is a tax resident in Singapore, certain procedures must be followed.
The employer is responsible for filing Form IR21A to report these gains within 30 days from the date of exercising, assigning, releasing, or acquiring the shares. Singpass holders also have the option to submit Form IR21A online. Subsequently, the director will receive a tax bill indicating the amount of tax owed based on the gains from ESOP/ESOW.
Compliance and Reporting Obligations
Singaporean companies have the responsibility to comply with tax regulations and fulfil reporting obligations concerning remuneration paid to non-resident directors. This includes deducting and remitting withholding tax to the IRAS within the stipulated timeline. Non-resident directors should also be aware of their own tax obligations in their home countries and ensure compliance with relevant tax laws.
Conclusion
In conclusion, the remuneration of non-resident directors is a significant aspect of corporate governance, contributing to the attraction of top talent and the facilitation of effective decision-making within companies. Understanding the taxation implications of such remuneration is crucial for both companies and directors to ensure compliance with regulatory requirements and to optimize tax efficiency.
In Singapore, renowned for its commitment to transparency, efficiency, and best practices, navigating the complexities of non-resident director remuneration taxation demands careful attention and professional guidance. By proactively seeking expert assistance and staying informed about regulatory changes, companies and directors can navigate the tax landscape with confidence, fostering a conducive environment for sustainable business growth and success in Singapore’s dynamic business ecosystem.
Corporate service providers, with their expertise in tax compliance, corporate governance, and regulatory frameworks, can play a pivotal role in assisting companies and directors in managing non-resident director remuneration. These providers offer specialized services tailored to the unique needs of businesses, ensuring adherence to tax laws, efficient structuring of remuneration packages, and proactive risk management. By leveraging the support of corporate service providers, companies and directors can enhance their tax compliance processes, streamline administrative burdens, and focus on driving value and innovation in their respective fields.
