When incorporating a Singapore company, the law mandates the appointment of at least one resident director on the board of the company. Singapore Companies Act mandates that a company must have a resident director on the board of directors of the company, a company can also appoint non-resident directors.
A company cannot function on its own. It requires officials and directors to control and manage its affairs. The directors play an important role in the overall functioning of the company. 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.
Non-resident directors and taxation
For tax purposes, a company director (or board director) is a member of the board of directors of a company. The tax obligation of a non-resident company director is different from that of an executive director. Taxable income of a non-resident director is the income of the director that is subject to tax.
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. A company director who is physically present in Singapore for less than 183 days in the year preceding the Year of Assessment (YA) is a non-resident director. The remuneration of a non-resident director is subject to withholding 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:
- Director’s Fees
- Accommodation provided
- Gains from stock options or any other share ownership plan
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 following sections state the taxes applicable on the remuneration of the non-resident directors for each of these capacities and the tax returns that should 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 22% of the director’s remuneration;
- File Form IR37; 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. The director does not have to file a tax return for the withholding tax.
Note that such payments are taxable regardless of the physical presence of individual in Singapore, so, it doesn’t matter where the board meeting was held or that the individual was not physically working in Singapore.
Gains from Stock Options and Stock Awards
Receive 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”. The employer should file the Form IR21A stating the gains from stock options or stock awards.
This form should be filed within a period of 30 days from the date of exercise, assignment, release or acquisition of the shares. The director will receive a tax bill on the amount of tax to pay.
Capacity as a Board and Executive Director
A company can set a non-resident director as an executive director of the company in cases where the director is involved in running the daily activities and business operations of the company. In order to function in this capacity, the company can appoint the non-resident director as the Chairman, Managing Director, Chief Executive Officer etc. Renumeration received in such capacity will be treated as employment income and therefore subject to employment income tax treatment.
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.
Each employer who appoints a non-resident executive director must notify IRAS and seek tax clearance when the employee ceases employment as an executive director. This process is known as Tax Clearance. At the point 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.
In Singapore, very often one or more of the company directors are non-resident individuals. That is because of a large number of global entrepreneurs and foreign companies whom setup their operations in Singapore every year because of the numerous advantages offered. It is best to seek the assistance of a qualified Singapore corporate service provider, thus, to ensure that the company as well as non-resident directors are compliant with the deductions and payments of applicable taxes.