Tax: Corportate vs Income

[expat51365]

Hi,

For a hypothetical sole shareholder & employee in a company X and tax resident in singapore, is it not infinitely better to take payment as dividend as opposed to salary bonus due to Singapores single tier taxation system ?

For instance, a company X taxable revenue is $500,000. Company is 1 year old. Taxable amount is $300,000 @17% = 51000. Less YA2017 rebate cap $20,000. Tax payable $31000. $120,000 salary taxed at $7950 and $500,000 dividend payment taxed at 0%.

Total tax payable $38950 on $620,000 'income' = 6.28%.

vs

Company X pays $500,000 bonus. Plus salary of $120,000. Income of $620,000 taxed at $44550 + $66000.

Total tax payable $110550 on $620,000 income = 17.83%.

The difference is huge and from what I have read, completely above board.

Am I missing something here ?

Thanks.

[sundaymorningstaple]

What is missing is common sense. Do you not think that IRAS would be wise to those people who attempt to pull those kinds of scams. They have seen it all.

[expat51365]

Thank you for the feedback.

Possible to elaborate why you classify that scenario as a 'scam' ?

From what I have read from IRAS websites, that scenario is 100% legal in Singapore, unless I am interpreting the tax systems there incorrectly?

[ComingSoon]

Thank you for the feedback.

Possible to elaborate why you classify that scenario as a 'scam' ?

From what I have read from IRAS websites, that scenario is 100% legal in Singapore, unless I am interpreting the tax systems there incorrectly?

I think there are two points that are being suggested, and are aimed at people who try and pay themselves salaries that are below market level to save taxes.

1. First, there is an expectation that a Director will take a reasonable salary. IRAS would likely frown upon someone taking an exceptionally low salary relative to their job responsibilities. In other words, the declared profits should be after market-rate expenses. In your example you mentioned a S$120,000 salary which seems reasonable.

2. Second, if virtually zero taxes are being declared then the benefit to Singapore is nil. Why should MOM extend visas if Singapore doesn't benefit? Also, if below market salaries are being paid then MOM may not deem the EP holder stable enough to remain in Singapore. Again, with S$120K salary you are paying some taxes and pretty stable so it shouldn't be an issue.

As long as you are paying yourself a reasonable salary then I think it is totally fine to pay the remainder as dividend instead of as Director fees. Why wouldn't it be?

[expat51365]

Thanks for the clarification ComingSoon.

Yes, there would always be income tax payable as MOM would have had to approve the directors EP and salary, implying that salary would already be accepted as being at or above market level, I assume.

If the business does well and pays dividends in accordance with corporate tax rules, then so be it.

I assume my interpretation is correct then, thanks.

[Strong Eagle]

It is possible to pay zero or close to zero tax. Corporate profits for the first three years have an exemption on the first hundred thousand of profit, and a fifty percent exemption on the next two hundred if I recall. Then, you pay yourself dividends, and voila, no tax.

Except, two things of note: As pointed out, IRAS has an expectation of reasonable compensation, like most other countries and they will come down on you for tax avoidance. And second, I knew a fellow on PR who did exactly this and paid no tax. Come time, his REP was not renewed. Buh-bye.

My company and its officers always ensured that we paid both personal and corporate taxes as applicable. And I judge it paid off in ways not entirely visible. For example, I never had an EP application turned down, and when the recession hit in 2008, government tax credits and direct payments more than made up for any taxes I paid.

Edited to add: OP, given the numbers you used, you would probably want to consider that approach to at least some degree.

If you had taxable profits of $500,000, then unless you have extremely high margins, you're running a company that generates millions in revenues. I think you'd want to look closely at your compensation as director so that it matches companies of similar revenue size. That way, were your return to be audited, you have a supportable position based upon Singapore norms. You'd also want to consider how the director's compensation is put together... a combination of base salary plus directors bonus is pretty common.

When you are at a supportable director's income level of over a $120,000 as you gave in your example, then this is an obvious strategy. The problems arise when sole shareholder and director are working for a company that makes a total of $100,000 but pays no salaries at all. That's a red flag.