Global Mobility Tax Services

Transcription

1 Global Mobility Tax Services Tax Special Interest Groups May 2015 Issue 5 Introduction to the Nexia Global Mobility Tax Services newsletter Contents 2 Australia 5 Germany 8 Netherlands 10 Switzerland 12 United Kingdom 14 United States Your tasks have become not only more challenging, but global. Often, you are in charge for an entity or organisation abroad. Being an executive and/or board member is an honour, but the tax and social security implications can have a significant impact your pocket. These can be extra costs or savings, ideally. Our experts would like to give you an insight about regulations specifically for executives and board member in various countries. Based on our daily advisory practice, we summarise the main criteria which you should consider in your personal tax planning. Specialist advisors from Nexia member firms all over the world are ready to support you by providing best practice guidance with a personal touch. Contributed by Sten Guensel Chairman of Global Mobility Tax Services GMTS May 2015: Issue 5 1

2 Australia Australian taxation of international executives A person s liability to Australian tax is determined by his/ her residence status for taxation purposes and the source of income derived by him/her. The general rule is that a person who is a resident of Australia is assessable on worldwide income (with the exception of exempt income as defined in the Australian tax legislation). Non-residents and temporary residents (as defined see below) are generally only assessable on income derived directly or indirectly from sources in Australia. Australian residence Generally speaking, individuals who come to Australia with the intention of living in Australia in a routine manner for six months or more would be treated as Australian tax residents from their date of arrival. A temporary resident is a person who is the holder of a temporary visa, such as the commonly obtained Temporary Work (Skilled) subclass 457 visa. Persons who are Australian citizens, permanent visa holders, or holders of special protection visas (or the spouse of one of these) cannot be considered temporary residents of Australia. International Executives would normally either be temporary residents or Australian permanent residents. Personal tax returns The tax year end is 30 June and tax returns are due by 31 October following the tax year-end. If an individual uses a registered tax agent to lodge their return, an extension is automatically available in some cases through to 5 June the following year. Australian Residents Tax returns are required to be filed by a resident individual whose total income derived from sources in and out of Australia is more than the minimum threshold (AU$18,200 for 2014/15). Spouses file separate tax returns. There is no joint filing in Australia. The tax-free threshold will be available only on a prorata basis in the tax year in which a taxpayer becomes an Australian resident (for tax purposes) or ceases to be an Australian resident (for tax purposes). Australian Non-residents Tax returns are required to be filed by non-residents who derive any Australiansourced income (other than dividends, interest, managed investment trust income or royalties, and departing Australia superannuation payments which are subject to a final withholding tax). They do not benefit from a tax free threshold. Australian Temporary Residents A temporary resident is exempt from Australian tax on income earned outside Australia. A temporary resident for this purpose is someone who: holds a temporary visa granted under the Migration Act 1958 this includes persons who enter Australia for work or study is not an Australian resident within the meaning of the Social Security Act 1991 and so is not eligible for social security benefits does not have a spouse who is an Australian citizen or who holds a permanent visa. As detailed above, temporary residents are generally individuals who are in Australia on a temporary visa such as a sub class 457 temporary business visa. Individuals may remain as temporary residents for as long as they hold the visa there is no time limit. The tax consequences for the temporary resident are (but not exclusively): foreign source income is exempt 2 GMTS May 2015: Issue 5

3 capital gains are exempt unless the asset disposed of has the necessary connection with Australia and would be taxable to a non-resident a temporary resident is taxed on capital gains from the sale of Australian real estate and, in some cases, from the sale of shares in Australian private companies tax does not have to be withheld and sent to the Tax Office when interest is sent overseas, eg when paying interest on a home loan in their home country. Tax rates Net taxable income is taxed at graduated rates ranging from 19% to 45% for 2014/2015 (excluding Medicare Levy, Medicare Levy Surcharge and Temporary Budget Repair Levy). Different higher graduated rates apply to non-residents, ranging from 32.5% to 45%, who also do not benefit from a tax free threshold. Temporary residents are however more beneficially taxed at resident rates and benefit from the tax free threshold. Pay as you go ( PAYG ) withholding tax is withheld from the employee s salary by the employer and paid to the ATO. The employee then receives a credit for the amount withheld which is applied against the tax assessed for the particular tax year. The final assessment will either see a refund (in the case of overpayment) or a payment (in the case where insufficient tax was withheld during the year). Fringe Benefits Tax ( FBT ) and FBT exemptions Generally, all non-cash benefits provided to employees are subject to FBT, a tax payable by the employer, with the value of such benefits being exempt from income tax in the hands of the employee. There exist certain exemptions from tax and FBT for individuals coming to work in Australia; these include (but not exclusively) the following: Children s education costs This covers the cost of fees, books, uniforms, excursions and any other education costs Home leave If you are living away from a home that is in another country to where you are working, a 50% reduction may apply to the taxable value of travel expenses paid by your employer for one holiday trip back to your home country, or to another country, per year for yourself and your family Relocation costs. Medicare levy & reciprocal healthcare agreements Medicare is a government scheme that gives Australian residents access to health care. In addition to income tax, if you are a resident, you need to pay the Medicare levy at a rate of 2% on taxable income, subject to exemptions for low-income earners. A further Medicare levy surcharge may be charged if your adjusted taxable income (which includes taxable income, reportable fringe benefits and other specific items) exceeds $90,001 (for singles) and $180,001 (for families). Reciprocal healthcare agreements Individuals who arrive in Australia from a country with which Australia has a reciprocal health agreement may also be entitled to Medicare benefits and services. These agreements are designed to provide overseas visitors with broadly the same level of healthcare benefits that would be received by an Australian who visited the particular overseas country. These countries are: Belgium Finland Italy Malta New Zealand Norway Republic of Ireland The Netherlands Slovenia Sweden United Kingdom To be covered by these agreements, you must generally have resided in one of these countries immediately prior to moving to Australia, or be a citizen in the case of Ireland and New Zealand. The level of benefits and services granted under these agreements are generally restricted to immediately necessary care only. As such, private medical insurance may still be required in order to obtain full health coverage. Superannuation guarantee (pension equivalent) Although employers are compulsorily required to make superannuation guarantee contributions at 9.5% of gross salary on behalf of their employees, including Executives and Directors, contributions may not have to be made for foreign nationals. Contributions do not have to be made for: non-resident employees who are paid for work done outside Australia non-resident employees for work done in the Joint Petroleum Development Area, within the meaning of the Petroleum (Timor Sea Treaty) Act 2003 GMTS May 2015: Issue 5 3

4 certain senior foreign executives working in Australia with short-term visas (this does not include 457 visa holders nor residents of New Zealand as they are not required to hold a visa to work in Australia). Bilateral Agreements & Certificate of Coverage Bilateral social security agreements are international agreements that Australia has entered into with certain other countries. These agreements address the issue of double superannuation coverage. This may occur where an individual works temporarily in Australia and super guarantee contributions (or equivalent) must normally be paid in Australia, as well as in the country in the individual usually resides. Super guarantee contributions (or equivalent) do not need to be paid in Australia if all of the following apply: where there is a bilateral social security agreement with Australia the individual remains covered in their country of usual residence by the superannuation guarantee law the employer has obtained a certificate of coverage from the relevant tax authority. Foreign income tax offsets (Australian permanent residents) Under the foreign income tax offset (FITO) system all assessable foreign-source income, including dividends, interest, and royalties derived by Australian residents (excluding temporary residents), will be subject to Australian income tax with a credit allowed for foreign tax paid on that income. An FITO is only available where both: a resident taxpayer s assessable income includes foreign income the taxpayer has paid foreign tax in respect of that foreign income, being tax for which the taxpayer was personally liable. The offset cannot exceed the amount of Australian tax payable on the foreign income. Tax effective salary packaging Salary packaging (also known as salary sacrifice) is an arrangement between an individual and their employer where some items or services are paid directly from pre-tax salary. This can reduce an employee s taxable income and increase take home amount. This is particularly effective for Executives who will likely be higher rate tax payers and will be provided with a number of fringe benefits as part of the terms of their engagement. A salary packaging arrangement must be entered into before income is earnt. It cannot be implemented retrospectively. There is no restriction on what can be salary packaged but whilst some benefits may be income tax free to the Executive, the employer may be subject to FBT at the highest marginal tax rate, Benefits can include (but not exclusively) lease cars, health insurance, school fees, childcare fees, other personal expenses, portable electronic devices, computer software, protective clothing, tools of the trade, briefcases etc. Redirecting some pre-tax income into superannuation also has benefits. These salary sacrificed contributions will be taxed by the super fund at 15%. Hypothetical tax/tax equalisation Australia permits use of tax equalisation or tax protection policies by companies of employees on foreign assignments. Such policies ensure that an Executive does not bear an extra tax burden as a result of the foreign assignment, while tax equalisation ensures that an Executive pays the same amount of tax as it would have done prior to the overseas assignment. Employee Share Schemes ( ESS ) The Australian tax implications associated with ESS arrangements for employees who relocate internationally between grant and vesting are complex. Currently options are subject to tax when they are provided to the employee (if there is no risk the employee will forfeit the options) rather than when they are converted into shares (exercised), and so before the employee can generally take practical steps to realise any gain to pay the tax. It has been announced that with effect from 1 July 2015, the Government will improve the tax treatment of ESS to facilitate better alignment of interests between employers and their employees, and to stimulate the growth of high technology start-ups in Australia by helping small unlisted companies to be more competitive in the labour market. The ultimate Australian tax treatment of employee share scheme income can be influenced by factors including, but not limited to, the size and age of the company, the terms of the plan, the type of instrument, the date of grant, the vesting date, the other country or countries of residence, and the Australian visa status of the employee. We recommend that Executives should seek advice that is specific to their facts and circumstances. Contributed by Amy Waterhouse, Nexia Australia E awaterhouse@nexiacourt.com.au 4 GMTS May 2015: Issue 5

5 Germany Social security and tax treatment of (executive) board members Social security 1 Germany has a well-developed social security system. As an employee paying statutory social security payments, you are sure of being protected against the biggest risks for example illness, occupational accidents, unemployment, or when you retire. If you are an employee in Germany and are subject to social security contributions, you will usually be a member of the following five statutory social security branches: The statutory health insurance fund, the statutory longterm care insurance fund, the statutory pension insurance fund, Statutory accident insurance and the statutory unemployment insurance fund. So, it has to be verified first, if an executive board member is an employee in the meaning of the social security legislation. The rules which apply to the management of public corporations ( Aktiengesellschaft, in the following: AG ) differ substantially from the rules applicable to private limited liability companies. The management board ( Vorstand ) of a public corporation can, as a general rule, independently manage the company and is subject to supervision by the supervisory board ( Aufsichtsrat ). The shareholders meeting ( Gesellschafterversammlung ) or the sole shareholder of a limited liability company may influence every single management issue by giving instructions to the managing directors ( Geschäftsführer, in the following: MD ). The shareholders are therefore more closely involved in the operation of the company. Generally an executive board member does not have a compulsory insured employment if he/she: is working like an entrepreneur, that means that he/she is personally, and without limit, liable for the company s liabilities has decisive influence on the strategy of the company, especially if he/she has influence on decisions made by the shareholder s meetings remuneration is only based on the profit or loss of the company. If an individual is director of a foreign legal entity, it has to be verified on a case-by-case basis whether this kind of entity is comparable to a German legal entity as described above. Managing Directors of public corporations ( Aktiengesellschaft, AG ) Although, members of an executive board of directors ( Vorstand ) of an AG are treated as employees for social security purposes, according to 1 sentence 4 Social Security Act VI ( Sozialgesetzbuch VI, SGB VI ) and 27 I No. 5 SGB III they are exempted from statutory pension and unemployment insurance. As this exemption is given by law to all members of executive boards of directors of public corporations it does not legally require an application. However, if a director wants to contribute voluntarily to the statutory pension and unemployment insurance, this is possible. The exemption from statutory pension and unemployment insurance for members of executive boards of directors of an AG is not limited to the activity of the board member itself. The exemption also applies to other employments within the same group if this other entity is a controlled company of a group in the meaning of 18 Public Corporations Act ( Aktiengesetz, AktG ). On the other hand, regarding the mandatory health and nursing insurance, a general exemption does not exist. In most cases, the director s salary will exceed the compulsory insurance threshold (in 2015: 53,550 per year); hence he/she has the choice of being a voluntary member of the German statutory health insurance or choosing a private health insurance coverage ( 6 SGB V). Therefore, members of the executive board of directors of an AG are also entitled to a tax-free employer contribution to either voluntary statutory health coverage or a private health insurance scheme. However, this is restricted to 50 % of the base contribution, being a maximum per month for health insurance and per month for nursing insurance. Directors of Limited Liability Companies ( GmbH ) Whether a managing director of a Limited liability company ( Gesellschaft mit beschränkter Haftung, in the following: GmbH ) is subject to statutory social security depends on the concrete circumstances and has been subject to a lot of court procedures as there is in addition no explicit legal regulation for directors of Limited liability companies. However, there is a relatively strict jurisdiction from which a catalogue of criteria arise. This can be used to determine if a director is considered to be an employee in the meaning of the social security legislation and jurisdiction: GMTS May 2015: Issue 5 5

6 Arguments for being an employee Managing director (MD) does not hold any shares of the company MD holds shares (or voting rights) of less than 50% Integration in the operational labor procedures Restricted responsibilities Non-competition clause Annual vacation Overtime is compensated Christmas bonus is paid Continuation of payment during sick leave Notice conditions agreed Fixed yearly or monthly salary Net-salary is actually paid out to director MD is under control and supervision of another managing director 181 BGB German Civil Code applies ( Selbstkontrahierungsverbot, it s forbidden to make a Contract between the company and himself) Subordination under another managing director Arguments for being an entrepreneur Capital share (or voting rights) of 50% or more Managing director has blocking minority Entrepreneurial risk Operative (daily) decisions can be made by the MD Free decision of his/her activity, time, duration and place of work Only performance-based remuneration MD has special knowledge of the industry or the business not available to anyone else Right to the immediate and only representation of the company MD has power to hire and fire employees MD is allowed to sign contracts between company and himself ( 181 BGB Selbstkontrahierungsverbot does not apply) Shareholders are family members and have the same aims/strategy However, at the end of the day, it is still a case-by-case decision considering the concrete overall situation. Because of that, in 2005 a compulsory status statement procedure ( Statusfeststellungsverfahren ) was introduced: According to 7a par. 1 s. 2 Social Security Act IV, the company is obliged to make an application to the clearing organization for social compulsory insurance of the German pension fund ( Deutsche Rentenversicherung Bund ) when a new managing director of a limited liability company is announced. The compulsory status statement procedure is concluded by a legally binding decision in the form of an answer about the status of the director. In 2008 a small version of a GmbH was introduced with the Unternehmergesellschaft (Haftungsbeschränkt) ( UG ) with less formal and capital regulations (no minimum capital needed for foundation). The social security legislation and jurisdiction as described above also applies to the UG. Taxation 2 Cross border taxation of remuneration as a member of a board Where a board member receives remuneration from an AG or a GmbH in another state than his state of permanent residence it has to be settled in which state the remuneration is subject to individual income tax and/or how double taxation of this remuneration can be avoided. A German resident company (AG or GmbH) founded under German company law is managed by a management board consisting of one or more managing directors (MD). The management board, in turn, is supervised by the supervisory board (SB), consisting of several members (so-called dual board system). For double tax treaty purposes, a member of the board receives either income from employment (MD) or directors fee (SB), depending on which body the board member belongs to. Non-executive (supervising) Directors of Public Corporations (or other corporations) According to the major opinion and jurisdiction, remuneration for being member of a non-executive (supervising) board ( Aufsichtsrat, in the following: SB ) of a Public corporation or other corporation is generally not treated as income of a dependent employment and is therefore not subject to German statutory social security contributions. 6 GMTS May 2015: Issue 5

7 According to German income tax law, remuneration as a managing director qualifies as income from employment and directors fees as income from self-employed work and the remuneration for this work is, in general, fully subject to German income tax. If Germany and the state of residence of the company have concluded a double tax treaty the right of taxation has to be allocated based on these regulations. For remuneration received from employment, in general the residence state of the company has the right of taxation of employment income (MD) which relates to work performed in that state. With some countries (e.g. Switzerland, Austria, Belgium, Japan, Poland, Sweden and the Netherlands expected from 2016) there is a special regulation agreed. In these cases the right of taxation of the employment income switches fully to the residence state of the company, irrespective of where the work is performed. In most tax treaties between Germany and the residence state of the company the right of taxation of directors fees lies in both countries. From a German taxation point of view the remuneration of a board member can be categorized as follows: Art. 15 OECD Special Art. 16 OECD MTC* (MD) regulation (MD) MTC* (SB) Right of Residence state Residence state Both, residence taxation of the company, of the company, state of the if the work is irrespective of individual and performed there; where the work the company Otherwise: is performed residence state of the individual (general rule) Double Tax exemption Tax exemption Tax credit Taxation under under Avoidance progression progression method clause clause * OECD Model Tax Convention Contrary to Germany, the company law of many other states constitutes a unitary board system in which the board provides both managing and supervisory duties. Therefore, from a German point of view it is questionable if the remuneration received by a board member resident in Germany (for double tax treaty purposes) from a corporation with a residence in another state qualifies as income from employment or directors fees. In the first case the other state would have the right of taxation solely or partly (based on the specific regulation in the double tax treaty) while in the second case the tax imposed on the remuneration abroad would be credited on the German income tax so that in most cases the tax burden would be raised to the German tax level. Example: A board member of a Swiss corporation resides in Germany. The activities for this work will be performed in different countries. In contrast to the German dual board system, Switzerland has a unitary board system characterized by a single board of directors (so-called Verwaltungsrat ). As far as a board member performs his work in the function as supervisor as well as managing director the remuneration qualifies fully as directors fees with the consequence that Germany avoids double taxation with a tax credit for the Swiss income tax against the German income tax. Nevertheless, the corporation s management can also be delegated by the board to a member of the board, who acts solely as managing director. In this case any remuneration received by this person qualifies as employment income for which Germany grants a tax exemption. The example shows that each case in which a person takes an official function within a unitary board system should be carefully examined, especially with regard to the classification of the remuneration as employment income or directors fee. From a German tax perspective this differentiation affects the relevant method to avoid double taxation. In case of employment income the income is exempted from German taxation (under progression clause). In case of directors fees, Germany grants a tax credit. Tax advantages granted under a foreign tax system might be lost in case of crediting (lower) foreign income tax against (higher) German income tax. Corporation tax impact possible Besides the personal income tax situation of the individual, the consequences for the company have to be considered too. If the individual in his function as managing director performs his work mainly in his residence state it has to be assessed whether the company constitutes a permanent establishment due to a place of management there. Contributed by 1 Astrid Zuleger, DHPG E astrid.zuleger@dhpg.de 2 Marion Gerber, Ebner Stolz E marion.gerber@ebnerstolz.de GMTS May 2015: Issue 5 7

8 Netherlands Social security and tax treatment of board members in the Netherlands Introduction Following the implementation of the Management and Supervision (Public and Private Companies) Act, on 1 January 2013, the Netherlands has in fact two systems for the board model of a public limited company (NV) or private limited company (BV). From the historical perspective, we know the dual board model, where, in addition to the board, there is also a supervisory board (twotier board). Since 1 January 2013, it is also possible to have a single board with executive and non-executive directors (one-tier board). To get the social security and tax treatment analysis off to a good start, it will first be necessary to take into account whether the board is a one-tier board (with executive and non-executive board members) or a two-tier board (with a Board of Directors and Supervisory Directors). In this article, I will first discuss the social security and tax treatment of directors (executive and non-executive) and supervisory directors. I will also go more deeply into the position of directors of listed companies and directors who own shares in the company of which they are directors. Tax treatment The allocation rules of the double taxation convention are the first important point with regard to the question of whether the remuneration of directors and supervisory directors is taxable in the Netherlands. This concerns the question of whether the work is performed on a non-selfemployed basis or whether the director s article in the convention applies. If the latter applies, the Netherlands has the full taxing right in the case of membership of the board of a company which is registered in the Netherlands. If the work is performed on a non-self-employed basis, the remuneration is only taxed in the Netherlands to the extent that the work is performed in the Netherlands. Therefore, in the first case, it is important to determine whether it concerns a director. It is usually assumed in the conventions that the interpretation has to be in line with the national legislation of the state which has implemented the convention, unless the context requires otherwise. Under the Netherlands tax conventions, the allocation of directors, both executive and non-executive, and supervisory directors, is synchronous. This means that on the basis of the director s article in conventions, taxation of the remuneration of the aforementioned directors and of supervisory directors will have been allocated to the Netherlands for taxation. An exception to this is the present convention with Germany, in which a distinction is made between directors (work performed on a non-self-employed basis and therefore taxed to the extent that the work is performed in the Netherlands, and remunerated supervisory directors, allocated to Germany for taxation). In the new convention which enters into force on 1 January 2016, this distinction will be removed. Under national legislation in the Netherlands, executive directors of companies are employees of the company of which they are a director. This means that their remuneration is taxable for the purposes of wage tax. The director is likewise deemed to receive income from employment for the purposes of income tax. This fact implies that the director is not entitled to a deduction for costs or any other such facilities to which people who are 8 GMTS May 2015: Issue 5

9 not in employment or working as an entrepreneur are entitled. If an employment situation applies, the remuneration and emoluments must be settled entirely at the level of the employer. The supervisory director and directors of a listed company are not employed by the company that appointed them. However, for the purposes of wage tax, they are deemed to be in a notional employment relationship. This does not affect the fact that providing a number of specific requirements are met for the purposes of income tax they can be considered as not being in an employment relationship or being an entrepreneur. In that case, the person concerned is entitled to, for example, deduction of costs and tax facilities. In certain circumstances, a non-executive director may be classified as not being in an employment relationship. In this case, extra attention has to be paid to the question of whether the non-executive director comes into the category of a notional supervisory director or whether there is a case of notional employment for wage tax and national insurance purposes. In the latter case, the person will generally have to perform the work for more than two days a week. As with a supervisory director of a company, a non-executive director may also be deemed not to be in an employment relationship or to be an entrepreneur, for the purposes of income tax. To avoid any discussion concerning the employment status with regard to wage tax, a notional provision has been included so that a director who is a substantial interest holder is deemed to be in a notional employment relationship with the company for which that director works. A substantial interest holding is deemed to exist if the director, alone or jointly with the director s partner for tax purposes, holds 5% or more of the shares in the company. The notional provision also applies if the substantial interest holder is not the director but the director s partner for tax purposes. This notional provision is therefore important because the substantial interest holder must receive a certain minimum salary for the work performed (remuneration must be roughly comparable to the going rate paid in the market). Owing to the allocation rules in the tax conventions, this arrangement also applies to directors/ substantial interest holders living abroad. Social security With regard to the rules in the Netherlands on compulsory social insurance, a director in a two-tier board and an executive director in a one-tier board are subject to compulsory social insurance because they work in an employment relationship. The same applies to a supervisory director, a non-executive director and a director of a listed company. A director who is also a shareholder in a company is in a special position. A director who has a major shareholding is classified as a director and major shareholder, and is not insured for the purposes of social insurance laws. According to the rules on directors and major shareholders, a director and major shareholder is: a director who jointly with spouse or otherwise holds shares representing at least fifty percent of the voting rights at the company s general meeting of shareholders a director who jointly with spouse or otherwise holds a number of shares such that the other shareholders do not have the required increased majority, if the articles of association stipulate that a resolution to suspend or dismiss the director may only be adopted by an increased majority at the company s general meeting of shareholders one of a group of directors who are entitled to cast the same, or more or less the same, number of votes at the company s general meeting of shareholders (for example, five directors who each have 20% of the voting rights, or three directors who have 33%, 33% and 34% respectively) the director of a company of which at least two thirds of the shares are held by blood relatives and relatives by marriage up to and including the third degree. GMTS May 2015: Issue 5 9

10 A director and major shareholder is entitled to demonstrate on the basis of facts and circumstances that he is, nevertheless, in an employment relationship, despite meeting one of the aforementioned four criteria. He will then have to demonstrate that he works in a subordinate position vis-à-vis the company. It is obviously important at the international level to determine in which country the director or supervisory director is ultimately covered by social insurance. Rules on this have been issued in Regulation EC 883/2004 with regard to the EU, as well as Norway, Iceland, Liechtenstein and Switzerland. The Netherlands has also concluded social security conventions with more than 35 countries, including Australia, Canada, India, Japan, Turkey, the United States and South Africa. In cases in which a social security convention or the Regulation does not apply, a non-resident of the Netherlands who performs work in the Netherlands is insured under the national insurance schemes and the Dutch Healthcare Insurance Act, but only in the case of a real employment relationship. This means that supervisory directors, for example, are not subject to compulsory insurance. Contributed by Bas Opmeer, FSV accountants + adviseurs BV E b.opmeer@fsv.nl Switzerland Tax and social security treatment of board members in Switzerland A lot of international companies have a group company domiciled in Switzerland. Since the changes in the Swiss Code of Obligation in 2008, only one person living in Switzerland, who is registered in the commercial register with single signatory power, must represent a Swiss company. This person can be a director and must not be member of the board. As consequence, most of the Swiss companies with foreign shareholders have a board comprising only foreigners without residence in Switzerland. Taxation Subject to withholding tax are payments to board members, directors or similar bodies of legal entities established or having their administration in Switzerland. Also subject Qualification of the remuneration According to Swiss law, the remuneration of board members of a Swiss company qualifies as income from employment and not as income from self-employment. This qualification can be very important especially for social security purposes. 10 GMTS May 2015: Issue 5

11 to withholding tax are payments to directors or similar bodies of foreign companies that maintain a permanent establishment in Switzerland. Also taxable are all royalties, attendance fees, retainers and similar payments that are paid to the taxpayer in his capacity as a board member, director or similar body of the legal entity. Not taxable are exclusively travel and accommodation expenses that are proven by supporting documents. The double taxation agreements concluded by Switzerland allocate the power to impose taxes on compensation paid to directors and persons treated as such in principle to the host country or source country (Switzerland). According to the negotiations in international tax law in October 2008, it was agreed that from 1st January 2009, as a rule, only people registered in the Commercial Register are subject to withholding taxes. However, the respective double taxation agreements of the countries of residence of the employees are still important. Remuneration paid to foreign board members are subject to a special withholding tax rate that is higher than the ordinary rate. The rate varies from canton to canton and is normally between 20 and 25% of the gross remuneration. Social security In accordance with the Agreement on the Free Movement of Persons between Switzerland and the EU, relations with EU Member States are governed by the provisions of Regulations (EC) No. 883/04 and (EC) No. 987/09 from 1st April Furthermore, since 1st January 2015 the provisions of the Regulation (EC) No. 465/2012 are also applicable and adapt these two Regulations. A foreign member of the board of a Swiss company working also in another member state is subject to social security in only one country. Depending on the qualification of the other employment, this can be in Switzerland or in the other country. As mentioned at the beginning, Switzerland classifies remuneration of board members as income from employment and not as income from self-employment. This classification can lead to an unexpected social security obligation in Switzerland. For this reason, it is very important to pay attention to this aspect before accepting a mandate as board member of a Swiss company. Example: If the foreign occupation qualifies as employment, the Swiss remuneration as board member is subject to social security in the foreign country. There is no additional obligation in Switzerland. But if the employment in the foreign country qualifies as self-employment, the whole income of self-employment as well as the remuneration as board member is subject to Swiss social security. The social security obligation is independent of the amount of the Swiss remuneration. An extreme example, CHF10,000 director s fee in Switzerland and EUR500,000 income from self-employment in an EU country leads to a social security obligation in Switzerland based on the total income. Board member with tax residence in Switzerland A foreign board member with fiscal residence in Switzerland is taxed at the ordinary withholding tax rate. Generally, there is no obligation to file an income tax return at the end of the year. As soon as the gross remuneration exceeds CHF120,000 per year (the amount varies in some cantons), an additional income tax return must be filed at the end of the year showing the worldwide income and wealth. The deducted withholding tax will be credited against the final tax burden based on the filed tax return. As an employed person, the foreign board member is subject to Swiss social security contributions as are all employed persons in Switzerland. Contributed by Stefanie Gugger, ABT Treuhandgesellschaft AG E stefanie.gugger@abt.ch GMTS May 2015: Issue 5 11

12 United Kingdom UK tax & social security rules for directors Introduction Under UK income tax and social security legislation directors of a company are effectively treated as employees. This is because the legislation applies to employees and to office holders. The term office holder includes both executive and non-executive directors. For the purposes of the relevant legislation a director means in relation to a company whose affairs are managed by a board of directors or similar body, a member of that board or body. The definition is extended to cover other more unusual circumstances such as where there is a single director. Where a director has a formal service contract, earnings will be subject to the UK National Minimum Wage legislation. There are some differences in very specific circumstances of when the income tax is due on directors earnings and also in the way in which social security is computed. These are outlined in more detail below. Income tax Under UK legislation, earnings are for a period and tax is only due if the director is chargeable to UK tax for that period. If the director is chargeable then tax is charged when the earnings are actually paid, which may be in a different tax year. It is when the payment is made that any payroll obligation will arise. See below with regard to when payment is deemed to be made. Payroll withholding The general rule in the UK is that earnings are required to be paid through the payroll at the earliest of: 1. When the payment is made, or 2. When the person becomes entitled to the payment. There is, however, a third Rule that applies to directors, which means that payroll withholding can apply at the earliest of the following, where this is earlier than the date of payment: 1. When the sums on account of the income are credited to the company s accounts or records 2. If the amount of income is determined before the period ends, the time when the period ends 3. If the amount of the income for a period is not determined until after the period ends, the time when the amount is determined. This means that the withholding may be due prior to the payment being made. Non UK resident directors Legislation means that a non UK resident director carrying out duties in the UK (even for a UK company) which are considered incidental to their duties outside of the UK would not be subject to UK tax on earnings for those duties. The exemption in the legislation does not, however, extend to director s duties as these will never be regarded as being incidental. For example, if a non UK resident director came to the UK to have a client meeting that may be considered incidental but if they came for the same length of time to attend a board meeting that would not be incidental and the earnings for that period would be subject to UK tax, unless exempt under the terms of a double tax treaty; although this is most unlikely in respect of director s duties undertaken in the UK. 12 GMTS May 2015: Issue 5

13 Companies with no place of business in the UK For companies with no place of business in the UK there is no requirement to operate payroll withholding. Place of business is not the same concept as a permanent establishment and it can be established, for example, through the company occupying premises. Companies from abroad coming to the UK should take care to establish if they will have a requirement to operate a UK payroll. Benefits in kind & equity compensation As well as tax on cash earnings, the UK tax treatment of benefits received and also the award of shares or share options will be required to be considered. Social Security General rule A UK resident employee will in general be subject to UK social security on their earnings and if the employee is liable then the employer will be liable to make employer contributions. The contributions are computed each pay date and the employee s deductions are collected by the employer by way of a payroll deduction. In general, the employee will be entitled each month to 1/12 of the annual exempt amount, 1/12th of the annual amount liable at a contribution rate of 12 % and the balance at 2%. However, for directors the position is different in that an annual (rather than monthly) earnings period applies. This results in the director receiving all of the annual exemption and the amount liable at 12% at the start of the year, meaning that more social security is paid earlier in the tax year (6 April to 5 April) than for employees. A non-resident employee of a non-resident employer is unlikely to be subject to UK social security for the first 52 weeks in the UK. After 52 weeks the employee will be liable to employees social security contributions but there will be no employer contributions if the employer does not have a place of business in the UK. Directors from overseas attending board meetings in the UK An administrative concession applies under which a nonresident director of a UK registered company will have no liability to UK social security if the only time the director comes to the UK is to attend board meetings and: 1. The director attends a maximum of 10 board meetings in a tax year, and 2. Each visit lasts no more than 2 nights at a time; or 3. If the director only attends 1 board meeting in a tax year, the visit last no more than 2 weeks. Directors from EU member states As mentioned above, the UK taxes directors as employees and not as self-employed. Therefore, a director from another Member State working in the UK will be subject to UK social security unless an A1 certificate has been issued. If the director is carrying out duties in another Member State and in that state is regarded as being self-employed it may complicate matters and could result in contributions being due in the UK. Although the UK does not collect employers social security contributions from employers who do not have a place of business in the UK this is not the case for EEA based employers. In these circumstances the UK will seek to collect the employers contributions from the overseas employer. Directors from other reciprocal agreement countries The UK has social security agreements with a few other countries. Under these agreements it may be that the general rule that no UK social Security is due for the first 52 weeks that an employee/director is in the UK if they are employed by a non-uk employer is extended. The most significant of the agreements is with the USA where the exemption from UK social security can be extended to 60 months. Contributed by Inez Anderson, Smith & Williamson E inez.anderson@smith.williamson.co.uk GMTS May 2015: Issue 5 13

14 United States Tax and social security treatment of board member compensation It is now fairly common for United States companies to have foreign nationals on their board of directors and similarly U.S. citizens often sit on foreign boards. United States tax obligations in these situations can be complex because of varying tax laws related to income and social security taxes and the interplay of income tax treaties and international social security agreements (so-called Totalization Agreements ). This article will cover the principal U.S. tax issues that are associated with respect to two scenarios (1) Compensation for services rendered in a foreign country by U.S. citizens and U.S. tax resident directors of foreign company boards and (2) Compensation for services performed in the United States by U.S. nonresident directors on U.S. company boards. U.S. citizens and tax residents on boards outside the U.S. An individual board member ( director ) is a resident for U.S. federal tax purposes if he or she is a U.S. citizen or lawful permanent resident of the United States (i.e., a green card holder), or if the director meets the substantial presence test. In general terms, an individual will meet the substantial presence test, if he or she spends 183 days or more in the U.S. in the applicable tax year or as determined under a three-year look-back formula. U.S. income taxation Domestic law Once it is established that a director is a U.S. citizen or tax resident, the director will generally be subject to U.S. federal taxation on a worldwide basis, including any compensation he or she receives for services performed as a board member of a foreign company. This board compensation is considered self-employment income under U.S. law; deductions related to this income are deductible in arriving at net self-employment income which is taxed at U.S. progressive tax rates up to 39.6%. Even if the U.S. has not concluded a treaty with the foreign country where board services are performed, the U.S. should allow a foreign tax credit for any foreign income tax that is imposed on such board fees. U.S. income tax treaties The U.S. treasury s model income tax treaty generally follows the OECD model treaty and has a specific provision for director s fees. This provision provides that where a U.S. citizen or U.S. resident acts as a director of a company resident in a treaty partner, the foreign country may tax the individual on director s fees related to services performed in that country. If the U.S. director is indeed subjected to foreign country taxation on those director s fees, the U.S. will generally allow a foreign tax credit, in order to avoid double taxation. Director s fees are considered self-employment income and U.S. tax treaties without a specific director s fees article will typically assign director s fees to the independent personal services article. This article provides that a U.S. citizen or U.S. tax resident earning director s fees from a company resident in the treaty partner is not taxable in that foreign country unless the individual has a fixed base regularly available to him or her in that country. Generally, a fixed base in this context means a permanent office available to the director. U.S. social security taxation Board fees are also considered self-employment income for U.S. Social Security tax purposes. Self-employment income is generally subject to Social Security taxation at a rate of 14 GMTS May 2015: Issue 5

15 15.3% up to $118,500 (2015 amount) of net earnings from self-employment and then the rate declines to 2.9% on selfemployment income in excess of $118,500. U.S. social security agreements Because U.S. Social Security taxation extends on a worldwide basis to the U.S. citizen or U.S. tax resident, many could face both U.S. and host country social security taxation of their director s fees. Aiming to solve this problem, the U.S. has entered into International Social Security agreements ( Totalization Agreements ) with 25 countries to eliminate dual Social Security taxation and to provide for benefit protection for those people who have divided their career between the U.S. and another country. Most U.S. agreements eliminate dual coverage of the self-employed by assigning the sole right of social security taxation to the worker s country of residence. Although the term resident is not defined in any of the agreements, it is generally believed that residence for income tax purposes is intended. Of course, U.S. citizens or U.S. tax residents sitting on foreign boards generally will not meet the requirements of being a foreign tax resident, not having spent the requisite amount of time in the foreign country; as a result, a U.S citizen or U.S. tax resident director working outside the United States for a limited number of days will normally remain covered and taxed under U.S. Social Security and should be exempt from foreign social security taxation. U.S. tax non residents on U.S. boards U.S. income taxation Domestic law U.S. tax nonresident directors ( nonresident directors ) are not subject to U.S. tax on their worldwide income, but rather only on their income from U.S. sources. Under U.S. tax principles, the sourcing rule for personal services is the country where the services are performed. Thus, director s fees received for services performed in the United States by a nonresident director are U.S. source income and subject to U.S. taxation. However, if a nonresident director performs his or her services for the board partly within and partly outside the United States, to the extent that some or all of the work is allocable to the United States, the director will be liable for U.S. tax only on the portion of the board compensation that is U.S. source. Performance of personal services within the United States is generally viewed as engaging in a U.S. trade or business. Therefore, in many or most cases, director s fees paid for such services is considered Effectively Connected Income (ECI) and thus, deductions allocable to this income are allowed and the net income is taxed by the U.S. at the graduated rates up to 39.6%. U.S. income tax treaties Those treaties that have a specific provision for director s fees generally provide that where an individual is a resident of the U.S. treaty partner and is compensated as a director of a company resident in the United States, the U.S. may tax the individual on those director s fees. As previously discussed, if the treaty does not have a specific director s fees article, the independent personal services article will usually apply and the nonresident director s compensation would not be taxable in the United States unless the director has a fixed base (such as a permanent office) in the United States to which the director s fees are attributable. Of course, a nonresident director may be also subject to home country taxation on director s fees earned in the United States. Most of the United States treaty partners would provide for a foreign tax credit or other allowance for any U.S. tax paid on director s fees. U.S. social security taxation Nonresidents are not subject to U.S. self-employment tax under U.S. domestic law and therefore the issue of double Social Security taxation of director s fees usually does not apply. However, as mentioned above, if a director of a U.S. board becomes a U.S. tax resident, most U.S. Totalization Agreements assign Social Security taxation to the individual s country of residence. Therefore, if the board member becomes a U.S. tax resident, he or she would then be subject to U.S. Social Security tax but then should be relieved of any home country social taxes. Whether providing director s fees to a U.S. citizen, U.S. tax resident or nonresident, the goal should be to provide the director with a tax-efficient compensation package. Therefore,, it is important to be aware of both the U.S. and foreign country income and social security tax obligations that may apply. Contributed by Dale Mason, The Wolf Group E dmason@thewolfgroup.com GMTS May 2015: Issue 5 15