Uncertainties about whether or not amounts payable to a company’s non-executive director (NED) are subject to deduction of employees’ tax have led to various misconceptions. In 2017, the South African Revenue Service (SARS) issued binding general rulings to clarify the issue.
Here’s everything you need to know about taxing director’s fees in South Africa.
Is there a director’s fees tax treatment?
Yes. Two binding general rulings, 40 and 41, issued by SARS in February 2017, provide the interpretation of the tax treatment of directors’ fees in South Africa. SARS confirms that NEDs must register for VAT for any director fees earned for services provided.
However, the value of the director fees must exceed the compulsory VAT registration threshold of R1 million in a 12-month consecutive period. The VAT registration threshold applies to the total value of all taxable supplies the non executive director makes in the 12 months.
SARS points out that NEDs receiving director’s fees exceeding the compulsory registration threshold must register as VAT vendors from 1t June 2017. It also clarifies that they’ll not need to account for non executive director fees received before this date, provided the NED was subject to PAYE.
However, the tax treatment of directors’ fees regarding VAT differs if you’re a non-resident. You’re not required to register for VAT in South Africa when serving on a board of a South African company as a non-resident unless you physically attend meetings. If you attend board meetings by video or teleconferencing, VAT liabilities don’t arise.
Directors’ fee vs salary
Before 2007, directors’ fees for services rendered were considered remuneration, and NEDs were subject to employee tax (PAYE). However, uncertainties rose in 2007 after amendments excluded the meaning of remuneration in the Fourth Schedule to the Income Tax Act No. 58 of 1962.
In the binding general ruling 40, SARS accepts that NEDs are not common law employees. Therefore, the director’s fees received by NEDs for services on a company’s board are not remuneration and will not be subject to an employment tax deduction.
Directors’ fees can only be considered a taxable salary if statutory tests apply. These include:
- The premises test – Under this test, services must be performed mainly at the client’s premises. In this context, ‘mainly’ refers to a quantitative measure of more than 50%.
- The control or supervision test – Under this test, supervision or control must be present in how the duties are performed or exercised in work hours.
The NED will be considered not conducting an independent practice only when both tests are satisfied. The rules of a common law employee will not apply if only one of the tests or neither is satisfied. However, the general ruling doesn’t apply to non-resident NEDs.
Do directors’ fees and non executive director fees differ?
No. SARS notes that the Companies Act doesn’t define NEDs, and there’s no distinction between the statutory duties of executive and non-executive directors. As such, there is no difference between executive directors’ fees and non executive director fees.
SARS considers NEDs to be directors who aren’t involved in the daily management and operations of the company. They only attend board meetings, vote, and provide objective judgment independent of management on issues like strategy, resources, performance, and diversity.
What are the directors’ taxes in different countries?
A common misconception among non-residents who receive directors’ fees is that they’re not liable to tax in South Africa. SARS notes that the binding general rulings which don’t consider director’s fees as remuneration don’t apply to non-resident NEDs. Therefore, directors’ fees withholding tax or PAYE and VAT may apply to non-resident directors who serve on the board of South African companies.
South African source rules in the Income Tax Act also note that income is regarded as derived from South Africa if the services relating to the income are rendered in South Africa. Since it can be difficult where a director performs their duties, the position is that the source of the director’s fees is where the head office is located.
SARS interpretation of head office is where the company’s senior management or direct support staff are primarily or predominantly located. If it’s established that the head office is in South Africa, the agreement between South Africa and the director’s country of residence will determine whether taxing rights can be enforced on directors’ fees.
Tax treaties between most countries, including South Africa, are based on the Organisation for Economic Co-operation and Development (OECD) Model Tax Convention. OECD members and many non-members follow article 16 of the model, which notes that directors’ fees and other similar payments derived by a member of a board of directors of a company of another state may be taxed by that state.
Are there exemptions to non-resident director’s fees withholding tax?
No. Although section 10 of the Act offers tax exemptions for income derived from foreign services if you spend a certain period outside South Africa, it only applies if the person providing the services is an employee.
SARS review and interpretation of the law confirm that directors are independent contractors who only hold an office and are not employed. Therefore, if they earn directors’ fees, such fees are not subject to an exemption under section 10.
Since the binding general rulings by SARS exclude non-residents when considering director’s fees as remuneration, their deduction of expenses will be limited by section 23(m) of the Act. Section 23 prohibits the deduction of certain expenses for employees and officeholders.
The section usually comes into operation when the losses, expenditures, or allowances are related to the office held, and the taxpayer derives remuneration from that office. Consequently, section 23 will prohibit certain deductions, and the director’s fees of non-resident directors will be subject to income tax irrespective of where they reside or render their services.
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SARS general rulings clarify that resident non executive directors’ fees are not classified as remuneration and, therefore, exempt from employee tax. Directors’ fees to non-resident board members are considered remuneration, and directors’ fees withholding tax, or PAYE, can apply. SARS also encourages you to register as a VAT vendor if your director fees exceed the compulsory VAT registration threshold of R1 million in 12 months. Want a bit more insight? Get in touch with us!
We have ten years of experience behind us and can assist you with a smooth, hassle-free tax and financial emigration from SA. More than that, we can provide you with helpful advice and insight into taxation in South Africa. For a friendly discussion regarding your immigration requirements, you can contact our team today! To contact our team, call us at +27 28 312 2764 or email us at info@finglobal.com, and we will get back to you as soon as possible.