Directors Fees and Renumeration In Singapore: What You Need To Know Legally

In Singapore, the remuneration of directors is a topic of significant legal and corporate governance interest. Directors, who are appointed to manage and oversee the operations of a company, are compensated for their services. This compensation, known as directors’ remuneration, includes any form of payment or benefit given to them in return for their services to the company.

Directors’ remuneration is guided by a robust legal framework, which ensures that directors’ remuneration is fair, transparent, and aligned with the interests of the company and its shareholders. This includes the Companies Act, the Accounting and Corporate Regulatory Authority (ACRA) guidelines, and various corporate governance codes.

The compensation of directors in Singapore typically takes two primary forms: directors’ fees and salaries. Directors’ fees are usually paid to non-executive directors for their participation in board meetings and contribution to the company’s strategic direction. On the other hand, salaries are typically associated with executive directors who are involved in the day-to-day management of the company.

Differentiating Between Directors’ Fees and Salaries

In Singapore, the distinction between directors’ fees and salaries is important for compliance with legal and tax regulations. This distinction also affects the way these payments are governed and disclosed.

1. Directors’ Fees: These are payments made to directors, typically non-executive directors, for their role in governing and advising the company. Directors’ fees are often predetermined and approved by the shareholders at the Annual General Meeting (AGM). They are not tied to the directors’ day-to-day involvement in the company’s operations but rather to their contributions to board meetings and strategic decision-making.
2. Salaries: Salaries are payments made to executive directors who take on additional roles in the daily management and operational activities of the company. Unlike directors’ fees, salaries are usually part of an employment contract and reflect the executive role and responsibilities held by the director. These are often subject to negotiation and are not typically approved by shareholders.

The clear demarcation between these two forms of remuneration is important for several reasons:

1. Taxation: The Inland Revenue Authority of Singapore (IRAS) views directors’ fees and salaries differently for tax purposes.
2. Corporate Governance: The way these payments are structured and disclosed can have implications for corporate governance. Transparency in how directors are compensated is important for maintaining shareholder trust and aligning the interests of directors with those of the company and its stakeholders.
3. Legal Compliance: Adhering to legal requirements regarding the approval and disclosure of directors’ fees and salaries is vital for compliance with the Companies Act and other relevant regulations in Singapore.

Legal Requirements for Directors’ Fees

The legal requirements governing directors’ fees are set forth primarily in the Companies Act and are supplemented by various guidelines and best practices.

1. Approval by Shareholders: The Companies Act mandates that directors’ fees must be approved by shareholders. This approval typically occurs at the Annual General Meeting (AGM). The amount proposed for directors’ fees must be transparent and justified, allowing shareholders to make informed decisions.
2. Mandatory Disclosure: Companies are required to disclose the amount of directors’ fees in their financial statements. This disclosure must be detailed and specific, breaking down the fees paid to each director.
3. Role of the Board: The board of directors can recommend the directors’ fees. However, the ultimate decision lies with the shareholders. The board must ensure that the proposed fees are fair and reflect the responsibilities and contributions of the directors.
4. Compliance with Guidelines: Companies in Singapore are advised to adhere to guidelines issued by regulatory bodies such as the Accounting and Corporate Regulatory Authority (ACRA) and the Singapore Exchange (SGX).
5. Consideration of Company Performance: The determination of directors’ fees often takes into account the performance of the company. This aligns the interests of the directors with those of the company and its shareholders, encouraging directors to focus on sustainable, long-term growth.

Taxation Implications for Directors’ Fees and Salaries

Tax considerations for directors’ fees and salaries affect both the individuals in these roles and the companies they work for.

1. Tax Treatment of Directors’ Fees: Directors’ fees are taxed as income under Singaporean law. These fees are subject to income tax at the individual director’s personal income tax rate. Directors’ fees are taxed on a receipt basis, meaning they are taxable in the year they are received.
2. Tax Treatment of Salaries: Salaries paid to directors, particularly executive directors, are treated as employment income. This income is subject to income tax at the individual’s personal tax rate. Unlike directors’ fees, salaries are taxed on an accrual basis, which means they are taxable in the year they are earned, regardless of when they are received.
3. Withholding Tax for Non-Resident Directors: For non-resident directors in Singapore, a withholding tax applies to the directors’ fees. This tax must be withheld by the company and paid to IRAS. The current withholding tax rate for non-resident directors’ fees is a flat rate as stipulated by IRAS.
4. CPF Contributions: Central Provident Fund (CPF) contributions are not applicable to directors’ fees. However, for directors who are employed by the company (i.e., executive directors), CPF contributions are applicable to their salary, subject to the prevailing CPF rules and contribution rates.

Regulations on Compensation Upon Director’s Departure

Compensation provided to directors upon their departure from a company is subject to specific regulations and guidelines:

1. Contractual Agreements and Severance Pay: The terms of compensation upon a director’s departure are often outlined in contractual agreements. This may include severance pay, which is based upon the terms of the contract and the circumstances of the departure.
2. Shareholder Approval for Compensation Packages: For listed companies, any significant compensation packages to departing directors may require approval from shareholders..
3. Disclosure Requirements: Companies are required to disclose information about compensation paid to departing directors in their financial statements. This includes the nature and amount of compensation.
4. Compliance with Legal and Regulatory Standards: The compensation upon departure must comply with the legal and regulatory standards set forth by the Companies Act, the Singapore Exchange (SGX), and other relevant authorities. This includes ensuring that the compensation is not excessive and is in line with the director’s contribution to the company.
5. Consideration of Company Performance: Compensation packages are often linked to the company’s performance during the director’s tenure. This is to ensure that the compensation reflects the director’s contribution to the company’s success or failure.
6. Non-Compete and Confidentiality Clauses: Compensation agreements may include non-compete and confidentiality clauses, which impose certain restrictions on the departing director.

Addressing Unfair or Unjust Remuneration

The legal framework provides mechanisms to address situations where director remuneration may be deemed unfair or unjust. These measures below are designed to protect the interests of shareholders and ensure good corporate governance.

1. Shareholder Rights and AGM Voting: Shareholders have the right to vote on directors’ remuneration at the Annual General Meeting (AGM). If a majority of shareholders believe that the remuneration is unjust or excessive, they can vote against the proposed remuneration package.
2. Role of the Remuneration Committee: Many companies establish a remuneration committee to recommend directors’ remuneration. The committee, typically composed of non-executive directors, is expected to ensure that remuneration is fair and aligns with the company’s performance and strategic objectives.
3. Legal Recourse for Shareholders: Shareholders may seek legal recourse if they believe that directors’ remuneration is not in the company’s best interests. This includes the possibility of challenging the decision in court, particularly if there is evidence of breach of fiduciary duties or non-compliance with the Companies Act.
4. Regulatory Oversight: Regulatory bodies like the Singapore Exchange (SGX) and the Accounting and Corporate Regulatory Authority (ACRA) oversee corporate governance practices, including directors’ remuneration. They can take action against companies that fail to adhere to governance standards.
5. Transparency and Disclosure Requirements: The requirement for detailed disclosure of directors’ remuneration in financial statements serves as a check against unfair practices. Transparency in remuneration policies helps shareholders to make informed decisions and hold directors accountable.
6. Best Practices and Guidelines: Adherence to best practices and guidelines issued by regulatory authorities and industry bodies is crucial. These practices often include benchmarks and parameters for reasonable director remuneration, considering factors like company size, industry standards, and performance.

Conclusion and Best Practices

Directors’ fees and remuneration in Singapore are subject to a comprehensive legal and regulatory framework, designed to ensure fairness, transparency, and alignment with corporate governance standards.By adhering to the legal and regulatory requirements and following best practices, companies can ensure that remuneration practices are fair, transparent, and contribute to the long-term success of the company. Speak to an employment lawyer that specialises in C-suite executives to learn more.