South African companies are increasingly looking to global expansion to build their capabilities and expand their operations into foreign jurisdictions. Where South Africans serve on the boards of foreign companies and render services to foreign entities, they typically do so in terms of split employment contracts in respect of their services rendered within and outside of South Africa. In addition to the remuneration, they may also receive directors’ fees for services rendered to the boards. Their employment contracts with the foreign company and the requirement that such services must be rendered outside of South Africa, are essential to ensure that these foreign entities are effectively managed in the countries where they are registered, and not in South Africa.
In addition to the individual South African tax and exchange control implications, it is also important to consider the foreign tax implications for those executives who find themselves on the boards of these companies. The possible exposure to income and social security taxes in the foreign jurisdictions can arise fairly easily and is an aspect of international planning that is often overlooked.
The Netherlands is a popular jurisdiction thanks to its favourable corporate tax rates, ruling practices and extensive treaty networks. In this article, we consider the South African and Dutch tax implications for the South African residents rendering services to Dutch companies.
South African tax implications
South Africa taxes the world-wide income of its residents. The remuneration derived by a South African resident for services rendered in a foreign jurisdiction would be subject to South African income tax, unless he or she would qualify for the so-called “foreign earnings exemption” contained in section 10(1)(o)(ii) of the Income Tax Act No 58 of 1962.
This provision exempts from tax in South Africa any form of remuneration received by or accrued to any employee in respect of services rendered outside South Africa for or on behalf of any employer (i.e. a South African employer or a foreign employer), provided that the employee rendered services outside South Africa
- for a period or periods exceeding 183 full days in aggregate during any period of 12 months; and
- for a continuous period exceeding 60 full days during that period of 12 months.
A South African resident who qualifies for the foreign earnings exemption will therefore be exempt from tax in South Africa in respect of any remuneration received for services rendered in the foreign jurisdiction.
Executives in the scenario under discussion would, however, often not qualify for the foreign earnings exemption because they will not meet the time periods specified above. An executive who does not qualify for the foreign earnings exemption and is not able to rely on the provisions of a double taxation treaty for relief from foreign taxes (see below), may claim a foreign tax credit for any foreign taxes paid in respect of this remuneration. The foreign tax credit will be limited to the South African tax attributable to this foreign income.
Since the remuneration or directors’ fees would be sourced in the Netherlands, one has to consider the potential application of the double taxation agreement South Africa has concluded with the Netherlands to determine which country has the right to tax the income.
Double taxation agreement with the Netherlands
Ordinarily, directors’ fees and other similar payments derived by a South African resident who is a director of a Dutch resident company will be taxed in the Netherlands. Since the executive will be employed by a Dutch employer, Article 14 of the double taxation agreement between the Kingdom of the Netherlands and the Republic of South Africa (“the Dutch DTA”) will allocate the taxing right of the remuneration to the Netherlands.
Article 14(2) of the Dutch DTA provides that remuneration derived by a South African resident in respect of employment exercised in the Netherlands shall be taxable only in South Africa, if the following requirements are met:
- the South African resident is present in the Netherlands for a period or periods of less than 183 days in aggregate in the fiscal year;
- the employer must not be a resident of the Netherlands; and
- the remuneration must not be borne by a permanent establishment or a fixed base which the employer has in the Netherlands.
In terms of Article 15 of the Dutch DTA, directors’ fees or other remuneration derived by a South African resident in his/her capacity as a member of the board of directors, including a “bestuurder” or a “commissaris” of a company resident in the Netherlands, may be taxed in the Netherlands.
Dutch tax implications
Based on Dutch national tax and social security legislation, a non-Dutch resident director of a Dutch entity is considered to be an employee. In the Netherlands, employers are obliged to withhold wage tax and social security contributions on the remuneration paid to their employees. Wage tax is a levy at source and can be set off against income tax.
The Dutch entity will need to register with the Dutch tax authorities for wage tax and social security purposes and maintain a monthly payroll for the calculation and payment of wage tax and social security contributions. Actual payment of the remuneration can be made by the Dutch entity or other group entity (e.g. the South African employer). Non-compliance with registration and withholding obligations may result in penalties being levied by the revenue authorities.
South African residents earning Dutch sourced income which is subject to Dutch wage tax are in principle also subject to Dutch national insurances and employee insurances.
National insurances cover old age pension, widow and orphans benefits, exceptional medical expenses and child benefit. The maximum contribution is approximately EUR 10 000 per annum which can be prorated to the actual days of presence in the Netherlands.
Employee insurances cover sickness, disablement, health insurance and unemployment insurance and the contributions are due by the employer. The maximum contribution is approximately EUR 9 500 per annum and is calculated based on the actual days worked in the Netherlands.
In many cases, non-Dutch residents are also appointed as statutory directors of a Dutch entity. As mentioned above, based on article 15 of the Dutch DTA, the Netherlands has the right to levy tax on the directors’ fees. In such cases, the Dutch tax authorities may argue that part of the executive’s remuneration is also deemed to be payment for the activities of the employee in his/her capacity as a director of the Dutch entity. The Netherlands could therefore impose a wage tax and income tax assessment on (part of) the director’s remuneration. In order to avoid any misinterpretation and or discussions in this regard, it is recommended to formally agree the director’s remuneration in the shareholders resolution in terms of which the director is appointed.
For highly skilled employees (i.e. directors) hired from abroad, the Netherlands have a special tax facility, the so called “30%-ruling”. Based on this ruling, 30% of the remuneration of directors’ fees can be paid out net as reimbursement for extraterritorial costs. The 30%-ruling can apply to resident and non-resident employees. Where the directors’ fees or employment income exceeds EUR 35 000 per annum, the ruling applies only to the amounts exceeding EUR 35 000. Further requirements should also be met. Under the ruling, the effective Dutch income tax rate reduces to 34,6% (including national insurances) while the highest tax rate applicable is 52%.
For South African resident employees/directors who do not qualify for the foreign earning exemption mentioned above, this ruling may, however, have limited benefit because the foreign tax credit will be limited to the South African tax paid on the foreign remuneration.
Individual disclosures to revenue authorities in South Africa and the foreign jurisdiction(s) should be carefully considered in the restructure of international corporate operations. Also, proper disclosures to all relevant tax authorities is an important component of proving that effective management takes place in the appropriate jurisdictions.
In order to reduce any Dutch wage tax and social security liabilities, correct and timely registration and withholding of taxes and social security should be considered. Also, the Dutch tax authorities could be approached to disclose and rectify previous or existing non-compliance and, provided the taxpayer (employer and/or employee) is not aware of a possible tax investigation, no penalties should be imposed upon such disclosure.
ENS Africa and Tax and Netherlands
ITA: Section 10(1)(o)(ii)
South Africa/Netherlands Double Tax Agreement: Articles 14 and 15