Tax treatment of director’s fees and bonuses from employment in Singapore
Introduction
Singapore has emerged as a global business hub, attracting numerous multinational corporations and fostering a vibrant corporate environment. As a result, the tax treatment of various components of executive compensation, such as director’s fees and bonuses, has become a significant aspect of Singapore’s taxation framework.
Service or fees
A company director can be paid by a remuneration related to:
- being an employee under a contract of service (e.g. salaries, commissions, allowances etc), or
- being an officer of the Company for the performance of statutory or governance duties under the Company Act, Constitution or Company governance (i.e. director’s fee).
Tax treatment of director’s fees
Director’s fees, as seen above, refer to the remuneration paid to individuals who serve as directors on the board of a company. In Singapore, director’s fees are treated as employment income and are subject to personal income tax. Director’s fees from employment constitute income of an individual in the year he is entitled to such fees or bonuses.
Timing
For director’s fees approved in arrears, the director has already rendered the requisite services for the accounting year concerned. However, the director’s fees must be disclosed to and approved by members of the company before they can be paid to him. Hence, the earliest date on which the director is entitled to the director’s fees, is the date the fees are voted and approved at the company’s AGM.
For director’s fees approved in advance, the director may not have rendered the requisite services for the accounting year concerned when the fees are approved at the company’s AGM.9 Hence, the earliest date on which the director can be entitled to the director’s fees, is as and when he renders his services.
Residency status
The tax treatment depends on the residency status of the director.
- Resident Directors:
For resident directors, the director’s fees are taxed at progressive resident tax rates. These rates range from 0% to 22%, depending on the director’s total taxable income. Resident directors are also eligible for personal tax reliefs and exemptions, which may help reduce their overall tax liability. - Non-Resident Directors:
Non-resident directors are individuals who are not tax residents of Singapore. The tax treatment of director’s fees for non-resident directors varies based on whether the services are performed in Singapore or outside Singapore:- a. Services performed in Singapore: if a non-resident director performs services in Singapore, the director’s fees are subject to withholding tax. The company paying the fees is responsible for deducting and remitting the withholding tax to the Inland Revenue Authority of Singapore (IRAS). The current withholding tax rate is 22%, which is a final tax and not further subject to personal income tax, except where a different rate is applicable from a Double Taxation Agreement with the foreign Country where the director is tax-resident.
- b. Services performed outside Singapore: if a non-resident director provides services solely outside Singapore, the director’s fees are not subject to Singapore tax. However, it is crucial to determine the source of the director’s fees accurately, as income sourced in Singapore would still be taxable.
Tax treatment of bonuses
Bonuses are performance-based rewards given to employees, including directors, in addition to their regular salary. The tax treatment of bonuses in Singapore depends on various factors, including the nature of the bonus, contractual agreements, and the residency status of the recipient.
Nature of the bonuses
The tax treatment of bonuses is influenced by whether they are considered contractual or non-contractual:
a. Contractual Bonuses:
Contractual bonuses are those that are contractually agreed upon between the employer and the director/employee. These bonuses are considered part of the director’s employment income and are subject to personal income tax based on the individual’s residency status.
For contractual bonuses, an employee becomes entitled to such bonuses in the year specified by the contract or bonus plan. This is usually the year in which the employee renders his services. However, where the employer’s liability to pay bonuses is contingent upon conditions to be met in the future, an employee becomes entitled to such bonuses when the conditions are met.
b. Non-Contractual Bonuses:
Non-contractual bonuses, often referred to as discretionary bonuses, are given at the discretion of the employer. These bonuses may be treated differently for tax purposes. In Singapore, non-contractual bonuses are generally not subject to tax if they are of a one-off nature and not received regularly.
For non-contractual bonuses, an employee becomes entitled to such bonuses on the date the bonuses are paid.
Residency status
Similar to director’s fees, the residency status of the director/employee affects the tax treatment of bonuses.
a. Resident Directors/Employees:
For resident directors/employees, bonuses are generally taxable under the progressive resident tax rates, along with other employment income.
b. Non-Resident Directors/Employees:
The tax treatment of bonuses for non-resident directors/employees depends on whether the services leading to the bonus are rendered in Singapore or outside Singapore. If the services are performed in Singapore, the bonus is subject to withholding tax at the current rate of 22%. If the services are rendered solely outside Singapore, the bonus may not be subject to Singapore tax, unless it is considered Singapore-sourced income.
Returned bonuses
In certain contracts, an employee is contractually entitled to receive a bonus (e.g. inducement bonus, on signing of a contract with an employer even before stipulated conditions are met). If the conditions are subsequently not met, the employee is contractually obliged to return the bonus in full or in part.
For such conditional bonus paid in advance, the bonus paid is considered to be income of the employee on the date of payment. If the employee subsequently returns the bonus in full or in part, the amount returned is considered as an adjustment of income in the year the amount is returned.
Chargeable CPF
Payments to the directors under contract of service (e.g. salaries, commission, etc) are generally subjected to CPF contributions (taking into account the residency status and working pass title), while director’s fees are not subjected to CPF contributions.
Tax deductibility of director’s fees and bonuses from employment
Under normal tax principles, expenses are only deductible when such expenses are incurred (i.e. when the liability to pay such expenses arises). As such, a company may claim deduction for director’s fees and employees’ bonuses only when the company’s liability to pay such fees or bonuses actually arises.
Provisions for director’s fees or employees’ bonuses made for a year where the amount and/or the timing of its payment are not properly ascertained will not be allowed deduction for the year.
Companies claiming a tax deduction on director’s fees, need not submit any supporting documents/information with their Income Tax Return. However, companies need to prepare and retain the following documents/information:
- a. the date on which the director’s fees were approved
- b. the amount being approved
- c. the year in which any unapproved amount is written back (if applicable) and
- d. the amount (if any) of director’s fees approved in arrears at the relevant AGM but the directors were entitled to the fees only after the accounting year in which such fees were approved.
Conclusion
In Singapore, the tax treatment of director’s fees and bonuses from employment is influenced by the residency status of the director/employee, the nature of the remuneration, and the source of the income.
Resident directors are subject to progressive resident tax rates, while non-resident directors may be subject to withholding tax based on the location of the services performed. It is crucial for both companies and individuals to understand the tax implications and comply with Singapore’s tax regulations to ensure proper reporting and payment of taxes related to director’s fees and bonuses.
Consulting a tax professional is advisable to navigate the complexities and ensure compliance with the prevailing tax laws in Singapore.
