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Loans to Directors - ACRA and IRAS impact

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MerLionKing
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Loans to Directors - ACRA and IRAS impact

Postby MerLionKing » Mon, 03 Aug 2015 3:56 pm

Hi There.

For the Singapore Law, Accounting and audit wizards here..

Just want to ask what would be the impact/ difference for a company if they extend loan/ advance to a director (non-resident):

1. The company is an Exempt Private Company. Would section 162 of the Company’s act sill apply to them (or has that act already been superseded?)

2. As far as I know, only the Personal Income Tax of the director would be affected as “deemed interest” would be computed by IRAS since they would treat the interest-free loan as an “employee” benefit for the Director. What would be the effect if the director is a non-resident?

3. What would be the possible effects if the director is also a shareholder (would it appear as a “disguised”/ “advanced” dividend payment?

Thank you so much Sirs/ Madams for your help. I know this might be a little tough but any help would be greatly appreciated.

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Re: Loans to Directors - ACRA and IRAS impact

Postby Strong Eagle » Tue, 04 Aug 2015 1:29 am

I am not a lawyer. I have read many, many statutes and articles relating to companies, directors, loans, and taxation. I make no claims to the veracity of the opinions presented here. But, I bet I've got it right.

There's a difference between a loan and an advance. Which is it you think you want to do? Exempt private limited companies can make loans to directors. However, "loans" as a mechanism to put cash in the hands of directors in a non taxable way will not be looked upon very positively.

IRAS knows how these scams work. In lieu of salary or directors fees, the director takes out a zero or low percentage loan that takes forever to pay back, or it is finally forgiven by the company. IRAS will finally get around to reviewing the financial statements, and while my inside line to IRAS and the ACRA seems to have been disconnected, loans will raise a red flag. If IRAS thinks you are scamming them, particularly with an overseas director, your company and directors will quickly end up on a black list.

If it is a legitimate loan, with a set amount for a set purposes (such as buying the director a home in a foreign country so that she can conduct business there), with set payback and interest, then your director's loan will probably pass muster.

But, given that you mix loans and advances in your question, it sounds a lot more like your question is how to avoid mandatory taxation of a non-resident director's payments before they leave Singapore. That is the IRAS regulation, you know. You pay your non-resident director $10,000, you must withhold $2,000 and send her $8,000. This is what you are trying to avoid, aren't you?

An advance is different than a loan. An advance is prepayment of an amount that both employer and employee/director agree is due to the employee/director at some future date. For example, at an EGM, a resolution is passed granting directors fees to be paid Oct 31. Those fees can be paid early as an advance but the tax liability still exists as though they were paid on Oct 31. In general directors fees taxation is based upon the date that they are declared, not actually paid.

Directors as shareholders taking dividends in lieu of salaries and/or directors fees is also a scam well known to IRAS. Because Singapore has a generous policy of little or no corporate tax on profits for the first three years, it becomes possible for the company to pay no tax and then for the director/shareholder to pay no tax on dividends received in lieu of salary.

If you do this, you'll get your ass in a crack in one of two ways. First, IRAS may determine that your employee/director is not being remunerated at a rate comparable to the work being performed and may call you on your scam. And second, since the company is contributing nothing to Singapore in terms of revenues, you might find that your EP's and PR's are not getting renewed.

You should also be aware that since the shareholder/director is non-resident, but is receiving loans and fees, particularly if they are substantial as opposed to those paid to local directors, IRAS may determine that your company is a non-resident company for taxation purposes. It doesn't matter where the company is incorporated, what matters is where the 'management and control' of the company is exercised. It sounds to me like the 'management and control' is being exercised by the non-resident director, and I would not be surprised to see your company classified as non-resident. This will significantly change your tax reporting requirements in Singapore, and will require that companies that do business with you withhold tax from payments to you for certain kinds of transactions.

Your locally resident director bears the responsibility for the actions and filings of your company.If I were your director, there is no way I would sign off on what you are proposing.

Edited to add: It sounds like your non-resident director is also the sole shareholder. Is that correct? What does your local director think about your loan ideas?

livingontheedge
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Re: Loans to Directors - ACRA and IRAS impact

Postby livingontheedge » Tue, 04 Aug 2015 10:22 am

1. No it does not apply (neither is the Section superseded)

2. Same tax treatment at the non-resident tax rate

3. The loan can be made to an individual who is both a director and a shareholder, in either one of their capacity, obviously for the shareholder capacity there is no tax on the interest benefit earned by the individual. But the burden of proof for a shareholder is higher having to show debtor/creditor relationship, agreement, the loan is given bona fide for specific reasons, and the loan is available, in the same terms and conditions, to all shareholders and quantum offered is in line with their respective ownership interests or other equitable form.

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Re: Loans to Directors - ACRA and IRAS impact

Postby Strong Eagle » Tue, 04 Aug 2015 11:33 am

livingontheedge wrote:1. No it does not apply (neither is the Section superseded)

2. Same tax treatment at the non-resident tax rate

3. The loan can be made to an individual who is both a director and a shareholder, in either one of their capacity, obviously for the shareholder capacity there is no tax on the interest benefit earned by the individual. But the burden of proof for a shareholder is higher having to show debtor/creditor relationship, agreement, the loan is given bona fide for specific reasons, and the loan is available, in the same terms and conditions, to all shareholders and quantum offered is in line with their respective ownership interests or other equitable form.


Indeed, and when the loan is made to the sole shareholder/director, who has otherwise not received compensation from the company, what do you think IRAS makes of the deal?

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Re: Loans to Directors - ACRA and IRAS impact

Postby livingontheedge » Tue, 04 Aug 2015 12:08 pm

Depends - case by case - have seen loans given to Directors who are also shareholders or just Directors. It all comes down to the paperwork - agreements, resolutions, etc.

Just to add - to everything SE explained above - the companies I have seen giving loans to Directors or Directors and Shareholders are typically financially healthy with strong cash flows. If your Company is not and you are doing this, you may not just be investigated by IRAS, but you may contravene the Companies Act.


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