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Common misconceptions: Tax treatment of directors' fees derived by non-resident
- 16 July 2020
- Individuals Tax
- Leani Nortje
Monday, 16 April 2018
Important:
This article is based on tax law for the tax year ending 28 February 2019.
Author: Leani Nortje (Webber Wentzel)
Many non-residents that derive directors' fees from a South African tax resident company believe that because they are non-resident and pay tax in their country of residence on such directors' fees they are not liable to tax in South Africa. This is a common misconception as non-residents remain taxable on South African sourced income (subject to tax treaty relief).
Section 9 of the Income Tax Act, 1962 (the Act) contains the legislated South African source rules. Where section 9 does not contain the source rules for certain types of income the rules are entrenched in South African common law. In this regard, the general rule with regards to services income is that the income will be regarded as being derived from a South African source if the services to which the income relates are rendered in South Africa. Another misconception is that this general rule similarly applies to income derived in respect of directors' services.
Due to the nature of directors' services which makes it difficult to ascertain the place where they perform their duties, the South African common law position with regards to director's fees is that the source of director’s fees is where the head office of the company is situated, irrespective of the place where the director resides and/ or performs the services.
The term "head office" is not specifically defined in the context of director's fees, but SARS interpretation note 6 which deals with place of effective management defines the term as "the place where a company's senior management and their direct support staff are located or, if they are located at more than one location, the place where they are primarily or predominantly located. A company’s head office is not necessarily the same as the place where the majority of its employees work or where its board typically meets". The interpretation note also notes that "members of senior management may operate from different locations on a more or less permanent basis. In these situations, the members may participate in meetings via telephone or video conferencing rather than by being physically present at meetings in a principal location. In these situations, the head office would normally be the location, if any, where the highest level of management (for example, the Managing Director and Financial Director) and their direct support staff are located." Although this interpretation of "head office" is not in the context of director's fees, it gives a good indication of SARS' interpretation of the term.
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This article first appeared on webberwentzel.com.