Director’s fees, salaries, and dividends

Director’s fees, salaries, and dividends are taxed differently in Singapore, and the method you choose can have significant tax implications for both the company and the director. Here’s a detailed look at how each is taxed and the considerations you should take into account:

1. Director's Fees

These are payments made to directors for their services to the company. Director's fees are typically approved by shareholders at the company's Annual General Meeting (AGM).

Tax Treatment

For the Company: Director's fees are generally tax-deductible for the company as they are considered a business expense.

For the Director: Director’s fees are subject to income tax in the hands of the director. They are considered employment income and must be declared in the director's personal income tax return.

2. Salary

Salary is a regular payment made to directors for their work, similar to payments made to other employees.

Tax Treatment

For the Company: Salaries paid to directors are tax-deductible as a business expense.

For the Director: Salaries are subject to income tax. The company must also contribute to the director's Central Provident Fund (CPF) if the director is a Singaporean or a Singapore Permanent Resident.

3. Dividends

Dividends are payments made to shareholders from the company’s after-tax profits.

Tax Treatment

For the Company: Dividends are not tax-deductible as they are paid out of after-tax profits.

For the Director: Dividends received by shareholders (including directors) are exempt from tax in Singapore. Singapore follows a single-tier corporate tax system, meaning dividends are not taxed in the hands of shareholders as the company has already paid tax on its profits.

Key Considerations

1. Tax Efficiency

• Director's Fees vs. Salary: Both are subject to personal income tax for the director, but salaries may incur additional CPF contributions. Director’s fees do not attract CPF contributions, making them potentially more tax-efficient.

• Dividends: Dividends are tax-free for the recipient, making them highly tax-efficient. However, they are paid out of after-tax profits, so the company does not get a tax deduction.

2. Cash Flow

• Director's Fees and Salary: These require regular cash outflows from the company. They also need to be approved (director’s fees) or contractually agreed (salary).

• Dividends: These are only paid when the company has distributable profits, providing flexibility in cash flow management.

3. Regulatory Compliance

• Director's Fees: Must be approved by shareholders and documented in AGM minutes.

• Salary: Subject to employment regulations and CPF contributions (for Singaporeans and PRs).

• Dividends: Can only be paid out of profits and must be declared at an AGM or EGM.

Example Scenario

Let's assume a director is deciding between receiving $100,000 as director's fees, salary, or dividends:

• Director's Fees: The company can deduct this amount as a business expense. The director will pay personal income tax on $100,000.

• Salary: The company can deduct this amount as a business expense, but it must also pay employer CPF contributions. The director will pay personal income tax on $100,000, and employee CPF contributions will apply.

• Dividends: The company cannot deduct this amount, as it is paid from after-tax profits. However, the director will not pay any tax on the $100,000 received as dividends.

Conclusion

The decision on whether to pay a director through fees, salary, or dividends depends on the company's financial situation, tax planning strategy, and the director’s personal tax situation. Dividends are often the most tax-efficient for the director but reduce the amount of profit available for reinvestment or other uses within the company. Consulting with a tax advisor is recommended to tailor the approach to your specific circumstances.