Role of Nominee Director

[LeeBurrow]

Hi all!

I'm planning to incorporate a company in Singapore as a foreign non-resident. Singapore feels like the logical place to incorporate because I spend a lot of time there, but travel mostly around the world while I work. The business climate looks friendly enough, low tax rates, low bureaucracy (or is that just an impression?), good business environment (that I've experienced).

I've contacted some incorporation services companies. The area where I'm very unclear about is in the nominee director (also called local director). They are necessary to incorporate in Singapore in my case as me and my business partner are not resident. Some incorporation services companies I've contacted have told me that there would be contractual restrictions on what the local director can and cannot do in the contract. The issue is I have no real idea what that means, and I'm a bit weary someone that I don't know be on the board of directors. The only way this would work is if I had full details about what he can and cannot do. However, the incorporation services companies don't seem too keen to disclose these details (probably because that's how they make their money), but I don't want to pay and then realise I'm not comfortable with the terms.

Any help or suggestion about my situation would be much appreciated! Thanks

[Myasis Dragon]

Hi all!

I'm planning to incorporate a company in Singapore as a foreign non-resident. Singapore feels like the logical place to incorporate because I spend a lot of time there, but travel mostly around the world while I work. The business climate looks friendly enough, low tax rates, low bureaucracy (or is that just an impression?), good business environment (that I've experienced).

I've contacted some incorporation services companies. The area where I'm very unclear about is in the nominee director (also called local director). They are necessary to incorporate in Singapore in my case as me and my business partner are not resident. Some incorporation services companies I've contacted have told me that there would be contractual restrictions on what the local director can and cannot do in the contract. The issue is I have no real idea what that means, and I'm a bit weary someone that I don't know be on the board of directors. The only way this would work is if I had full details about what he can and cannot do. However, the incorporation services companies don't seem too keen to disclose these details (probably because that's how they make their money), but I don't want to pay and then realise I'm not comfortable with the terms.

Any help or suggestion about my situation would be much appreciated! Thanks

A "nominee" director is defined in the Singapore Companies Act as a person who has declared themselves to have a special relationship with a shareholder. For example, a shareholder with a 30 percent interest in the company might place a director on the board, and the board must be informed that this director may have conflicting interests between the company and the shareholder. All of the incorporation companies use the term because, obviously, if you're setting up a single shareholder company, the director IS your director.

Beyond that, "nominee" is a bullshit word. A director is a director is a director, and there is no distinction between types of directors, because there aren't any. What is not bullshit, however, is that you may not, through contract, articles of incorporation, or any other vehicle, change the powers, duties, responsibilities, and consequences that may befall a director, as defined in the Companies Act.

So, first of all, you have either misunderstood what they told you, or they are full of shit. You cannot contractually limit a director.

Here is the deal. Directors are criminally and civilly responsible for all acts of the company. Period. End. That's it. Here's a thread to prove the point: viewtopic.php?f=22&t=135802&p=826689

That means that if the company you want to open launders money, evades taxes, fails to pay its employees, or does any other thing that violates civil or criminal law, it is the director that is called to account.

Therefore, most of these firms want to crawl up your ass with a microscope. They will insist on being your accountant, your secretary, and your auditor. They will want access to all your bank records. They will want to review and approve all your contracts and your employment pass requests. They will check into funds being deposited into your account to make sure that you're not taking money from a Romanian gangster. They will see where you are sending money to make sure that you're not funding another shell company.

And they will charge you out the ass for this... because they are liable.

Again, the duties and responsibilities of a director under the Companies Act cannot be limited by any contractual device you might try to cook up. So, you might ask them just what it is they think they are going to limit by contract.

On the flip side, you are at the complete mercy of your rented director. As the shareholder, you can only replace directors. They run the company, and remember, you cannot limit their powers by contract. Most folks that get a rented director also insist on a signed, undated letter of director resignation so that if your rented director does screw you, you can force a resignation.

Write again if you have more questions.

[LeeBurrow]

Thanks for this. My company is going to be an online education business, there's no intention of doing anything illegal. My goal is to protect myself and my business against local directors that may "screw my business" as you say, and I am very happy to contractually accept anything that would protect the nominee director as a counterparty...

Here is what I have been told by what looks like a reputable incorporation services company:

"
In the eyes of the law, there is no difference between a regular director and a nominee director. The Companies Act states, “The business of a company shall be managed by, or under the direction or supervision of, the directors” and that, “The directors may exercise all the powers of a company except any power that [the Companies Act] or the constitution of the company requires the company to exercise in general meeting”. In general, this means directors have the authority to make all decisions on behalf of the company unless the matter requires an ordinary or special resolution decided upon by a shareholder vote.

Therefore, it's important to appoint a reputable corporate service provider to handle the affairs of the company. Such a service provider will not only appoint a "professional" local director (usually one of their senior staff members) but also contractually limit the powers of a nominee director via the service agreement. Furthermore, you will be asked to appoint one or more executive directors to manage the affairs of the company. When you want to appoint a nominee local director for your company, you should have complete peace of mind and that's what a professional service provider will offer.
"

"but also contractually limit the powers of a nominee director via the service agreement" this is what's important here. This made me think that there was a service agreement that could be signed between me and the local director to protect ourselves.

I found this as well: https://www.slideshare.net/jovitstephen ... -by-. with the first paragraph being the important part

[LeeBurrow]

I think the outbound link don't work here. It was a document from (apparently) Rivkin that said: "
The nominee is a director of a company in name only and has no authority or responsibilities. They are not entitled to enter into any business contracts, financial or moral obligations. He will be given the power of attorney to carry on few daily works of the company but the real decisions are made in the board meetings and by the directors who make a regular evaluation of the nominee director. A nominee director might be from an existing company but his duties will not correspond to the interests of his own company. Most nominee directors are ex-businessmen and corporate heads or retired personnel."

[Myasis Dragon]

Absolutely not enforceable. They want to avoid taking responsibility for your acts. Sign it, if you want, but they can't do that legally.

This is the Companies Act: https://sso.agc.gov.sg/Act/CoA1967

Here is what it says in Section 172:

Provision protecting officers from liability

172.—(1) Any provision that purports to exempt an officer of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void.

(2) Any provision by which a company directly or indirectly provides an indemnity (to any extent) for an officer of the company against any liability attaching to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company is void, except as permitted by section 172A or 172B.

(3) This section shall apply to any provision, whether contained in a company’s constitution or in any contract with the company or otherwise.

So... you can see that they can ask for whatever they want but it is null and void. You might ask them why Section 172 of the Companies Act doesn't apply to them.

They don't want to sign contracts and they will want you to be a director or senior manager to sign the contracts (which has tax implications for you) but they are still not absolved of your acts.

[Myasis Dragon]

To expand on my comments regarding tax consequences of you becoming a director:

They want you to become a director so that you are the one to enter into contracts and manage the company. Any director individually can do these things, even though all directors are jointly liable for the actions of the company... hence the reason that the service agreement is not enforceable... they can refuse to sign contracts but are still liable for the contracts you sign.

If you become registered as a director in ACRA's Bizfile (which you must do to be a director), you will become a non-resident director. For tax purposes, non-resident directors, and certain senior management positions of Singapore companies (CFO, CIO, CEO, global sales manager, etc), are considered to be working for a Singapore company, in Singapore, regardless of actual residence, and are therefore resident for tax purposes. In this situation IRAS requires that the company withhold income tax at the rate of 22 percent before sending the money to you. You get paid $1000, the company withholds $220 and sends it to IRAS, and then sends the $780 to you.

Bear in mind that you can be called "executive director" or "CEO" or "Managing Director" or whatever but in the eyes of the Companies Act all directors are equal, no matter the title.

However, there is an odd paragraph in Singapore's tax website, IRAS, which states that certain payments made to Managing Directors may not be considered as subject to withholding. You would want to contact IRAS for clarification of your situation.

[LeeBurrow]

Thanks a lot, I have just written a message, but the submission apparently didn't work.
This is all very informative, could be use for reference for people with the same question in the future.

What you're saying about section 172 is on the liability for the directors side. There are two dimensions:
1) Protection of the company and its shareholders against the possible criminals acts of an ill-intentioned local director. This is about restricting the powers of the director into his ability to do certain things on behalf of the company. After that he can pretend he's able to do these things, but may not have that authority assigned to him/her
2) Protection of the local director against the possible criminal acts of other directors and/or shareholders of the company (like in the link you mentioned).

Section 172 is pretty clear and its alineas A and B are pretty clear about that (I concur), but this is for point 2) here. The local director is not protected by the criminal actions of other directors and/or shareholders that use the company to conduct illegal activities (that's actually the point of requiring that one of the director is a local).

However, I don't see section 172 as prohibiting an agreement with the director to restrict his/her reach in the business. Do you agree?

[Myasis Dragon]

However, I don't see section 172 as prohibiting an agreement with the director to restrict his/her reach in the business. Do you agree?

I agree. But:

a) That in no way reduces their liability for acts you may commit, even though their intention is obviously to try to create that limitation. They don't want to sign a contract that they know nothing about, which is reasonable, but if you sign the same contract and get the company in legal trouble as a result, it is still their problem.

b) They can agree in writing to restrict their reach in your business but this in no way limits their ability to do so, or their liability for the operations of the business. Were they to commit an act that you perceived as detrimental to you, you'd have to sue them, as a shareholder, on the basis of a breach in their (director's) fiduciary duty and not because they violated your agreement. You cannot limit the powers of a director according to Section 172, and that means that when they say they won't sign contracts, it doesn't mean that they can't... indeed, they still can. You can't limit that power. At most it is a gentleman's agreement.

Consider this from the perspective of someone doing business with the company. You come along, make a deal with a company director, and the director signs a contract. You then spend $100,000 in order produce your deliverables under the contract that was signed. Only, now another director says, "Oh, that director wasn't authorized to sign contracts. He had an agreement with us." You'd be out $100,000... except that the courts would find that agreement null and void. All directors have the same rights, duties, and responsibilities, agreements notwithstanding.

[PNGMK]

Lee,

The days of nominee director's are slowly coming to an end, what I am experiencing personally more and more is people reaching out to Singaporeans and PR's they know personally forming companies with those people as the resident director. I am director of three companies here and I am expected to be active in the business and not just a "nominee" and it works better IMO.

By the ways the education business is a NOTORIOUS front for money laundering in Asia. So notorious that Michael Milkin has bought into an International School here along with very dubious looking eastern europe characters who favour black range rovers as their mode of transport.

PNGMK

[LeeBurrow]

Yeah it looks like from what I'm hearing that Singapore is Casablanca for non-resident foreigners, you don't know who to trust, and you can't be protected. It's unfortunate that some took advantage of the model. I'll look elsewhere...

[Myasis Dragon]

Yeah it looks like from what I'm hearing that Singapore is Casablanca for non-resident foreigners, you don't know who to trust, and you can't be protected. It's unfortunate that some took advantage of the model. I'll look elsewhere...

I'm not suggesting that you not setup your business in Singapore, just that you should do it with eyes open. I setup businesses in Singapore, Malaysia, Thailand, and Hong Kong, as well as a taxation entity in Australia. Without question, Singapore is the best/easiest place to setup a business, perhaps with the exception of Hong Kong, but with the Chinese thugs taking over there, I wouldn't consider Hong Kong. Singapore is about the most honest, corruption free place you can find in Asia.

In terms of ease of setting up a business, Singapore and Hong Kong are the easiest, Malaysia not too terribly bad, especially if you can qualify your business to get into one of the enterprise zones, and Thailand is a fair pain in the ass, as well as being time consuming and requiring substantial investment. I've not done it myself but have friends who can testify that setting up businesses in Indonesia, Vietnam, or India can be an absolute labyrinth of red tape and bribes.

It used to be that every CPA in Singapore had some auntie or uncle lying about who would be happy to be your resident director (that's the key - you must have one resident director), and they would do it for about $600 per year. But then, a few of the CPA firms got seriously hammered because the companies for which they were directors were caught in illegal activities such as money laundering and tax evasion transactions. The 1MDB Malaysian scandal didn't help, and pretty soon the accounting professional organizations Singapore warned all their members about the perils of renting out directors.

The companies that continue to rent out directors believe that they can control risks to themselves by taking two approaches.

First, they will want to be your accountant, your auditor, and your secretary so that they can watch and verify each and every transaction that is made by your business. Electronic banking has turned money laundering into an art form, so they'll want bank transactions (and actually the bank will want to know all about you as well with the advent of "know your customer"... no more, "Oh, gee... I didn't know he was a corrupt Indonesian general taking bribes."). You'll have to put your contracts in front of them. They will want to approve your work permit applications. All to protect themselves from you.

For this, you will pay. I used to pay around $300 per month for accounting and financial statement preparation activities, and another $600 to $1000 for an annual audit. I've been out of Singapore for a while but I understand that companies that will provide you a director want at least $1500 per year for the director and around $1000 to $1500 per month for accounting and audit activities. You should consider these expenses against your pro forma financials.

And second, these companies will attempt to limit their liability by having you sign the kinds of documents you mentioned..."we're not responsible for this... we won't sign contracts for that." Go ahead and sign them... they don't matter if push comes to shove. I don't think you need to worry about any of these companies or directors trying to screw you on purpose... after all, the whole point of their entire interaction is to remain squeaky clean as directors.

But that doesn't mean that if they so desired, they would take actions perceived to protect themselves that could be detrimental to you. And that's why you have signed, undated resignation letters from your directors... to protect yourself... you predate the letter to resign a director before the onerous action was taken.

In short, you are well protected by Singapore law as a shareholder. WIth a reputable company, you're not going to get screwed by them except for self protection issues, and you can reduce your risk for that.

You mentioned that because these guys don't want to sign contracts, apparently believing that it limits their liability, they want you to become a director. If this happens, you go from being an investor and potentially an employee that is taxed in your home country, to being a director that is taxed in Singapore at 22 percent. If this matters to you, you should find another rented director company which doesn't require you to become a director. They exist.

I'll close with two things. First, why do you want to setup in Singapore? And not the USA, or anywhere else in the world? Yes, corporate taxes are cheap in Singapore, but 95 percent of the businesses in the USA are LLC's, pass through entities not subject to tax at all. And of course, there are the multiple "offshore" countries that setup all sorts of companies.

And finally... my definition of true pain in the ass. That was my yearly corporate tax return I had to file in Thailand. More than 240 pages long. All written in Thai. It had to be signed on every page. It was beyond amazing. Signing it took an evening and a third of a bottle of scotch.

[LeeBurrow]

Thanks again. I would need to be director of the company so what you're saying about the taxation makes me weary too.

I'm exploring my options simply, I want to (a) choose a place that has an infrastructure that would accept services like Stripe as means of payment/not frowned upon by commercial banking institutions (b) low bureaucracy (c) low tax (d) climate that is business friendly/lots of networking opportunities (e) costs of incorporation low (f) a country with lawyers knowledgeable in IP law/international taxation (g) English as main language. Originally, I wanted HK but because of the political situation, it's a no-go (and I've heard that you would want to speak Cantonese should any issue arise), and SG was next on the list of places that fit that description.

I'm looking at the UK too.

I think the whole issue as well is to not get double-taxed. First, you get taxed by the corporate tax, and then dividends are issued, and that's tax on your income tax which depends where you live. Sometimes you have to even pay some tax to the country where your company is incorporated on top of your country of tax residency.

I think from what you're saying is that unless I know someone well in SG, it's risky to incorporate there, and may not even be optimal tax-wise anyway.

[PNGMK]

It's probably worth speaking to OCRA or similar. They have a good handle on what jurisdictions work best for which model you need.

[LeeBurrow]

Thanks both of you, very informative.

[PNGMK]

You're welcome Lee. Best of luck in your endeavours. The field of offshore companies and taxation is full of scamsters and misinformation it seems.