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director's fees for entrepreneur

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StephGolf
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director's fees for entrepreneur

Postby StephGolf » Sat, 30 Mar 2013 1:25 am

Hi,

I've been reading some interesting posts on director's fees vs salary but I'd like to have more clarity for my particular situation.

I am a foreigner who incorporated a company in Singapore, and I am not a resident (I don't live in Singapore, I am not a PR etc).

I would like to pay myself some kind of income and minimize the total taxes to be paid by the company and by myself. Director's fees seem to be an interesting way to achieve this objective.

My understanding is that they are taxed at 20% for the recipient but there is no tax at all (no CPF or other taxes) for the company, which can also deduct the director's fees from its taxable income.

Is it correct? Is there a better way to achieve the goal of minimizing the total amount of taxes paid by the company + the recipient of the funds (whether paid as director's fees, employment income, or any other way?).

Thanks in advance!

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JR8
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Postby JR8 » Sat, 30 Mar 2013 1:33 am

I think Strong Eagle is probably the SME on this. If he's not along within a day or so, maybe ping him with a PM containing a link to the topic + request for his opinion.

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Postby sundaymorningstaple » Sat, 30 Mar 2013 6:51 am

As it's early and I'm about to leave for the office, I don't have the time, but this has been discussed here several times and usually by Strong Eagle so if you were to use the search function located in the centre of the page below the banner "SINGAPORE EXPATS FORUM" with different key words, I'm pretty sure you will find the right topics.

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Re: director's fees for entrepreneur

Postby taxico » Sat, 30 Mar 2013 11:10 am

StephGolf wrote:I am a foreigner who incorporated a company in Singapore, and I am not a resident (I don't live in Singapore, I am not a PR etc).

I would like to pay myself some kind of income and minimize the total taxes to be paid by the company and by myself. Director's fees seem to be an interesting way to achieve this objective...


when did you start your singapore company?

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Strong Eagle
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Postby Strong Eagle » Mon, 01 Apr 2013 6:46 am

First, you are a non-resident director. Therefore, any directors fees paid to you are taxed at 20 percent and the company is required to withhold and remit your taxes. So, if you are paid $1000, you will receive $800, and your company will forward $200 to IRAS. Regular, old, run of the mill directors (ie - serve on the board only) cannot receive a salary. In this scenario, the company takes a director fee deduction of $800, a taxes paid deduction of $200, and you pay nothing.

You can declare yourself as an executive director, that is, declare that you are actively running the company, and give yourself a title such as Managing Director, Director of Finance, etc. Now, you can pay yourself a salary, which is taxable in Singapore as though you are a foreigner present for more than 61 days, and less than 183 days. You will pay tax at either 15 percent or the local resident tax rate, whichever is more. You must file and IR8A tax form, and your company will be held liable for unpaid taxes. In this scenario, the company pays you $1000, takes a $1000 expense deduction against income, and you pay the personal tax rate on this... $150. You get $50 more, and for the company it is a complete wash, expense wise. I believe that the company is still required to withhold your personal tax since you are overseas, but instead of a company expense, its holding your personal tax payments in escrow... you should check this.

I don't see how paying foreign directors fees or salary in this manner is tax and profit effective if you are also the sole shareholder of the company. Singapore corporate tax rates are a flat 17 percent. However, as an incorporated company, you are entitled to a waiver of tax on income up to $100,000 for the first 3 years. Singapore registered companies also get a partial exemption up to $300,000 of income, so your actual corporate tax looks something like this.

First 3 years

0 - 100K = 0%
100K - 300K = 8.5%
300K and up = 17 percent

Subsequent Years

0 - 300K = 8.5%
300K and up = 17 percent

So, here are a couple of scenarios.

a) Your company has $300,000 worth of gross sales, $100,000 profit. You pay out the profit as directors fees, yielding a net profit of $0. Company pays $0 in corporate income tax, but pays $20,000 in your personal tax as a non resident director. You end up with $80,000 for the year.

b) Company has the same $100,000 profit but this time you are an executive director. Now, your effective tax rate for non resident salary is 15% and you end up with $85,000 for the year.

c) You earn $100,000 profit as before, but instead of paying anybody anything, you instead declare a dividend. If less than 3 years old, you have 0 tax on the first 100K, so you can declare a dividend of 100K. If more than 3 years old, you pay 8.5% tax, or $8,500, leaving you with $91,500 for the year.

You need to consider two additional aspects in these scenarios. First, I've not addressed tax treatment of your income in your home country. If they have a tax treaty with Singapore, then generally, taxes paid on income in another country offset any taxes due in your home country. You need to see which of the three scenarios works best in light of your home country tax rules.

Second, if you want a joyous and wonderful working relationship with the Singapore gahmen, you might not want to avail yourself of every last penny of tax relief you might be entitled to. Considering a PR for yourself? Maybe an EP for you or for some people you want to employ? Consider this, and it is only anecdotal. I am aware of a gentleman who took advantage of scenario 3 above... paid himself in dividends (which are not personally taxable in Singapore), and essentially paid zero tax personally or for his company. It came time for his PR REP to be renewed... it wasn't. He had contributed zero to Singapore.

Contrast this with my firm. I have always paid more tax than I was legally obligate to pay, had I used c) above and other tricks. There were two positive effects. First, even as a small company, every EP I applied for was granted in a matter of days. Coincidence? I don't know, and I got what I needed. And secondly, during the 2008 crash, because I paid taxes, I got substantial incentives and tax breaks which have more than made up for what I paid when I didn't have to.

Bottom line: If you are in the $100K range I have used for examples, you can avoid a lot of tax. I also believe that you go on the radar, and that you will be much more carefully scrutinized in your dealings with the gahmen. Maybe SMS, with many years of Singapore company experiences, can chime in here.

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Thanks

Postby StephGolf » Mon, 01 Apr 2013 10:55 am

I would like to address my warmest thanks to Strong Eagle for such a detailed post, full of insights, and really answering my question.

A few additional comments on my side:
- I am not the only shareholder of the company, so we'll need to find the right balance between management compensation and shareholders returns in the long run
- I understand from your post that employment income (salaries) is more tax effective than director's fees, however I have another concern in that case: labour laws. I'm not familiar with labour laws in Singapore and understand that they probably are more employer-friendly than in many countries, but here is the scenario now: in the next year or two additional directors in the same situation than me receive compensation from the company. Director's fees seem to be straightforward, but if all directors perceive a salary what are the additional liabilities for the company related to employment etc?

Thanking you again!

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Postby JR8 » Mon, 01 Apr 2013 11:20 am

Strong Eagle wrote: Second, if you want a joyous and wonderful working relationship with the Singapore gahmen, you might not want to avail yourself of every last penny of tax relief you might be entitled to.


Sounds counter-intuitive, but it's not.

I have an acquaintance who is a landlord in London, in a personal capacity he has 100+ units. This is a side-line, he has a full-time job too. His whole operation is (IIRC) within a corporate trust via a Jersey shell company. He pays a flat 10% UK income tax.

His rationale is, he'd pay 40% via personal UK tax residence and ownership. And he'd pay 0% if he off-shored it.

But if he off-shored it he'd never have the IR off his back. And by paying 10%, which 'he knows they know he knows' is essentially voluntary, they aren't even gonna touch him.

p.s. His lawyers who set him up are Cohen, Cohen & Cohen, £2,000/hr. [No, seriously!]

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Postby JR8 » Mon, 01 Apr 2013 11:43 am

Then on top of that, he rents to/via 'social landlords', for example councils and housing associations. Bullet-proof rent. Lock in 12% yield, on 4% financing. Repeat*100.

Most people don't do that, as letting to those on the dole = you get a lot of asylum seekers, rehab, and so on, and it's pretty high-maintenance.

So not a lot of people want to go that route, they'd rather rent to 'people like us'.

So he uses that to his own advantage. He feeds this under-supply by locking in renewable 5-year contracts with housing providers at a significant premium. A 5 year term is his sweetener. In return any changes needed (Fire safety + the other 10001 city rules on occupants being provided with lint-free eco-friendly asbestos underpants etc, they have to fund themselves. He's had a council (Westminster) remodel a 1 bed flat into a 2 bed unit, to his plans, just because they were so desperate to take on a 2 bed unit. He divines the direction of the wind, and let's it fill his sail.

Martin, ex swaps trader, and landlord. Sharp as a box of razers.

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Strong Eagle
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Re: Thanks

Postby Strong Eagle » Tue, 02 Apr 2013 1:05 am

StephGolf wrote:I would like to address my warmest thanks to Strong Eagle for such a detailed post, full of insights, and really answering my question.


Thank you. You are welcome.

A few additional comments on my side:
- I am not the only shareholder of the company, so we'll need to find the right balance between management compensation and shareholders returns in the long run


Then using dividends as a form of compensation to avoid tax is not really practical. Singapore company law requires that dividends must be paid equally to each qualifying share, and generally while you can create classes of shares that are voting or non voting, you cannot create classes of shares that do no receive dividends. You could create a class of preferential shares that received a different dividend amount... and now life gets much more complicated.

- I understand from your post that employment income (salaries) is more tax effective than director's fees, however I have another concern in that case: labour laws. I'm not familiar with labour laws in Singapore and understand that they probably are more employer-friendly than in many countries, but here is the scenario now: in the next year or two additional directors in the same situation than me receive compensation from the company. Director's fees seem to be straightforward, but if all directors perceive a salary what are the additional liabilities for the company related to employment etc?

Thanking you again!


There really isn't much of an issue with respect to labor laws. Assuming everyone meets the requirements for being a director, and you declare that you are an executive director, then you can pay salary and/or directors fees. For Singapore citizens and PR's the situation is different, as salaries are subject to CPF contributions while directors fees are not (although both are taxed at exactly the same rate for income tax purposes).

It occurs to me, though, that the government must be aware of the 5% differential on taxes for salaries versus non resident directors fees. It wouldn't surprise me if IRAS were to ask for evidence of being an executive director... for example, signatory on a bank account and checks paid, or being the person that signs contracts with clients.

Otherwise, I don't see issues. You don't have to pay directors fees in the same amount to each director, you can set them via a resolution to whatever you want them to be for each director.

Everything you would want to know about companies in Singapore can be found here.

http://statutes.agc.gov.sg/aol/search/d ... %3A0;rec=0

And, this page provides a decent summary.

http://www.singaporelaw.sg/content/CompanyLaw.html

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Postby StephGolf » Tue, 02 Apr 2013 12:41 pm

Great. Thank you again so much.


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