Shareholder-Nominated Non-Executive Directors: Navigating VAT, Income Tax, And PAYE Challenges



ENS is an independent law firm with over 200 years of experience. The firm has over 600 practitioners in 14 offices on the continent, in Ghana, Mauritius, Namibia, Rwanda, South Africa, Tanzania and Uganda.
Section 69(7)(a) of the Companies Act No. 71 of 2008 states that a company is ‘ineligible' to be appointed as a director of another company.
South Africa Tax
To print this article, all you need is to be registered or login on

Section 69(7)(a) of the Companies Act No. 71 of 2008 states that a company is ‘ineligible' to be appointed as a director of another company. In practice, however, non-executive directors (‘NEDs') are often nominated by the company's shareholders to represent that shareholder on the board and advance their interests in the company (‘nominated NED'). In such instances, the nominating-shareholder (as opposed to the NED) may also choose to recover the NED fees directly from the company.

This situation raises several noteworthy aspects from a Value-Added Tax (‘VAT'), Income Tax, and Employee Tax (‘PAYE') perspective. While the South African Revenue Service (‘SARS'), in Binding General Ruling 40 (‘BGR 40'), provides clarity on the obligation to deduct PAYE on NED fees, BGR 40 does not address the income tax consequences of NED fees generally, and in particular, the situation where the shareholder (as opposed to the shareholder-nominated NED) recovers such fees from the subsidiary-company. Similarly, this situation is not explicitly addressed by SARS, from a VAT perspective, in Binding General Ruling 41 (‘BGR 41').

In this article, we take a closer look at the tax position of shareholder-nominated NEDs, particularly those instances where NED fees are recovered by the nominating- shareholder.


SARS confirms in BGR 41 that a NED is regarded as carrying on an “enterprise” for VAT purposes in respect of their NED activities. Therefore, a NED is required to register for VAT in their individual capacity (as an independent contractor, or sole proprietor) if the total value of their director fees exceeds the VAT registration threshold of R1 million in any consecutive 12-month period. Activities physically performed outside South Africa by the NED may qualify for zero-rating under certain conditions, but are still counted towards taxable supplies (these supplies are subject to VAT albeit at a VAT rate of 0%).

Further, SARS notes in its ‘Frequently Asked Questions on BGRs (Binding General Rulings) 40 and 41' that a shareholder-nominated NED must include in their taxable supplies calculation the NED fees paid directly by the company (on whose board they serve) to the shareholder, regardless of whether the shareholder retains some or all of these fees. This is because the fees are considered to be a consideration for services rendered by the NED in their individual capacity, not that of the nominating-shareholder.

As a VAT vendor, a NED is not permitted to account for VAT on their director fees through another vendor, such as a company or other entity. The NED services are provided by them personally (as the contractual “supplier” for VAT purposes), notwithstanding the payment mechanism in place between the company, the shareholder and the NED in this regard. This also aligns with the legal stance that only natural persons can serve as NEDs. Therefore, the VAT treatment of NED fees should be carefully evaluated to ensure that the VAT has correctly been accounted for by the NED in their personal capacity (i.e., the NED's own VAT returns).

Further, the VAT Act generally requires that vendors must provide VAT-inclusive pricing. Where a NED belatedly registers for VAT, the issue of pricing is thrust into the foreground. Unless VAT was taken into account when NED fees were agreed, a NED could risk forfeiting 15/115 (or approximately 13%) of its fees in the event that this component of an agreed fee is considered VAT “charged” in respect of its NED services.

Income Tax

Generally, NED fees derived from a South African company are included in the ‘gross income' of the resident NED. For non-resident NEDs, only South African-sourced income is taxable; the common law provides that the source of NED fees is the place where the company's head office is situated. Therefore, NED fees earned by non-resident NEDs would typically be taxable in South Africa if the company's head office is located here, barring any applicable Double Tax Agreement between South Africa and the NED's country of residence.

Regarding NED fees recovered by nominating-shareholders, paragraph (c)(ii) of the ‘gross income' definition in the Income Tax Act No. 58 of 1962 (as amended) (‘ITA') should be considered. According to this paragraph, an amount received by or accrued to a person (e.g., the nominating-shareholder) in respect of services rendered by another person (e.g., the nominated NED) is deemed to have been received by or to have accrued to the service-rendering individual (e.g., the nominated NED). This implies that NED fees may be subject to income tax in the hands of the nominated NED, regardless of the recovery of fees by the nominating-shareholder. Possibly to mitigate potential adverse effects of this provision, SARS issued Practice Note 4 of 1985 (‘PN4'), which specifically addresses this scenario, suggesting that under certain conditions, NED fees will not be subject to income tax in the hands of the nominated NED.


As stated, BGR 40 clarifies that NED fees paid to a resident NED are not subject to PAYE deductions since NEDs are considered independent contractors (or sole proprietors). However, this exclusion does not extend to non-resident NEDs. Moreover, a PAYE withholding obligation may arise on NED fees paid to a nominating-shareholder if that entity is classified as a ‘personal service provider' (‘PSP') under the Fourth Schedule of the ITA. Although the definition of PSP has various requirements, in this context, the nominating-shareholder would likely be a PSP if the NED is a ‘connected person' to the nominating-shareholder and if more than 80% of the nominating-shareholder's income, during a year of assessment, is derived from one client.

Way forward

Navigating the tax consequences of shareholder-nominated NEDs, particularly when the nominating-shareholder recovers the NED fees, can be a complex process. The VAT and income tax consequences require careful consideration of the relevant legislation and SARS pronouncements like PN4. A sound understanding of the relevant PAYE obligations in this regard is crucial too.

For companies and shareholders considering this type of director appointment structure, consulting with a qualified tax professional is highly recommended. If NED fees have been incorrectly treated in the past, a tax professional can advise on remedial steps, such as voluntary disclosures, to help achieve a compliant position going forward.

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.

See More Popular Content From

Mondaq uses cookies on this website. By using our website you agree to our use of cookies as set out in our Privacy Policy.

Learn More