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Directors Fees: Tax & Exchange Control Implications in the context of Global Operations

Tax Consequences

Globalisation has created wonderful opportunities for businesses to expand their reach across the borders of various jurisdictions and increase their market share significantly. In addition, it has enabled many investors and companies to invest in operations beyond the jurisdictions in which they reside or are registered. Markets are no longer compartmentalised based on jurisdiction and as a consequence multi-national companies have had to adapt the manner in which they control and manage their operations. Stakeholder demands and board composition/representation are more challenging and as such it is not uncommon to find directors appointed to boards of companies which are domiciled in jurisdictions other than that in which the directors reside.

Companies domiciled in South Africa need to determine whether employees’ tax has to be withheld from directors’ fees paid to their executive directors. This is due to the fact that directors of public companies are “employees” of such companies in terms of paragraph (a) of the definition of “employees” contained in paragraph 1 of the Fourth Schedule to the Income Tax Act, No 58 of 1962 which deals with employees’ tax, amongst others. Directors of private companies not formally employed by the private companies are also “employees” for employees’ tax purposes in terms of paragraph (g) of the same definition of “employee”. Directors’ fees and any other amounts paid to directors of public and private companies are subject to employees’ tax. Directors of private companies must also submit provisional tax returns and special rules apply to determine the employees’ tax that needs to be withheld from the remuneration of directors of private companies.

The taxation of non-executive directors who attend board meetings only is more complex as companies need to determine whether they are employees or qualify as independent contractors. The independence of resident non-executive directors must be determined with reference to one of three tests, i.e. the “three or more employees engaged on a full-time basis” test, the “services performed mainly at the premises” test and the “control or supervision” test, all of which are referred to in the provisos to paragraph (ii) of the definition of “remuneration” found in paragraph 1 of the Fourth Schedule as well as the common law dominant impression test. If the non-executive directors are found to be independent (not to be confused with the concept of independence as defined in corporate governance terms), then no employees’ tax needs to be withheld. Non-resident non-executive directors will however always be treated as employees for employees’ tax purposes, i.e. employees’ tax must be withheld from any directors’ fees paid to them.

Most double tax agreements deal with directors’ fees (usually contained in Article 16 if the OECD model tax convention is followed), whether paid to an individual or a legal person in the capacity of a member of a board of directors of a company. This article takes a practical approach as it is often difficult to determine where the services were in fact performed. It provides that directors’ fees may be taxed in the country in which the company is domiciled regardless of where the services of these directors are performed.

South African tax residents serving as directors of companies not domiciled in South Africa may therefore be subject to taxes levied in the country in which the companies are domiciled as well as to income tax in South Africa. They will be entitled to a foreign tax credit against the South African tax payable on such fees or, if so provided in terms of a double tax agreement, may not be subject to South African tax on the fees.

Exchange Control Consequences

There is no limit on directors’ fees which may be paid to non-residents. Requests to transfer such fees to directors’ must be accompanied by a copy of the resolution of the board of the remitting company confirming the amount to be paid to the director and proof that the director is non-resident.

South African resident individuals are not required to repatriate fees to South Africa if the related services were rendered to non-residents whilst physically abroad. They are however required to repatriate the fees to South Africa is the services were rendered whilst physically in South Africa.


Martie Foster

Martie has a BCom (accounting), BCom (hons), HDip (Tax Law), Certificate in Financial Markets (AFM), CA (SA) and Masters in Taxation (International tax)(cum laude). After completing her articles at Deloitte, Martie took up a position as Tax and Treasury Manager at Columbus Stainless where she spent 5 years. She then spent 5 years as SABMiller’s Tax Manager, 4 years at Ernst & Young and 7 years at Webber Wentzel (formerly Mallinicks) before leaving in mid-2012 to focus on corporate tax consulting as a member of the Corporate Law Alliance, and joining Caveat Legal in 2013.

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