South Africa: Personal Tax Consequences For South African Executives On Foreign Boards – The Netherlands As An Example

Last Updated: 30 September 2013
Most Read Contributor in South Africa, September 2018

Article by Hanneke Farrand and Chris van Wijngaarden - Taxand Netherlands

Introduction

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.

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 discussions 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

Remuneration

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 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.

Directors' fees

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

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 pro-rated to the actual days of presence in the Netherlands.

Employee insurances

Employee insurances cover sickness, disablement, health insurance and unemployment insurance and are a contribution which is 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.

Remuneration

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.

30%-ruling

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.

Conclusion

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions