Seamus Hand and Ted McGrath comment on the briefing recently issued by the Revenue Commissioners which sets out their views on the tax treatment that should apply to directorships of Irish companies, which has particular application to Ireland’s funds industry.
The content of the Revenue Commissioners’ recent briefing on Directors’ Remuneration serves as a reminder of Revenue’s view in particular circumstances. However, as with many areas of taxation, it is important to note that it can be difficult to apply a “one size fits all” approach to complex rules and differing commercial arrangements.
What does tax law say? Irish tax law imposes an income tax charge on income (via the PAYE regime) from an “office” with an Irish company. A director (board member) of a company is an office holder for this purpose.
The charge to Irish tax under domestic law applies irrespective of the residency of the director - Irish tax will apply to income related to duties as a director, even where the director is resident abroad and all of the duties are exercised abroad. Most double taxation agreements will not override this Irish taxation.
The key considerations when looking at payments to directors for services (related to the directorship) is whether the payment is considered “profits or gains arising from the office” and who is “entitled” to these profits or gains.
While the Revenue briefing, for the most part, restates the general position under existing law, confirming Revenue’s interpretation thereof, it does not necessarily cover all common commercial arrangements in respect of directorship related services. As a result it will be important for individual arrangements to be considered to determine how the relevant tax rules apply.
Revenue state that mandating of remuneration arising from an office to a third party does not remove the remuneration from the charge to tax under the PAYE system. This makes sense from a technical perspective, insofar as simply making a payment of director’s fees to which the director is entitled to another person would not change the tax treatment of that payment. This position is supported by the findings of the Irish Supreme Court in the case of Dolan v K.
That case involved a nun who was entitled to remuneration from the Department of Education for acting as a school teacher. The nun disputed her assessment to tax, on grounds that the salary had not been received by her beneficially as she was obliged to hand over her salary to her Order. The Court held that the salary was taxable, with the voluntary forgoing of it simply being an application of the income. However, a key element of the judgment is that the nun was entitled to the payment. Where, for example, the Order (rather than any individual) was entitled to a payment from the Department for the provision of individuals to act as school teachers, voluntary foregoing by the individuals would not be relevant.
Commercial arrangements There are situations where individuals sit on the boards of companies as directors at the behest of their third party employers without any entitlement to remuneration from the office. In addition some companies provide various services to their clients which include the provision of its employees to act as directors.
Revenue’s briefing and the Dolan case do not specifically address situations where third parties make an individual available to act as director in return for a fee. A relatively common commercial example demonstrates the range of potential issues that must be considered. Where an employee of a consultancy firm is assigned by his employer to become a director of a client company for a period, the individual will normally receive his salary from the consultancy firm he works for without any entitlement for remuneration from the office or company concerned. The consultancy firm will invoice the company for the services provided including the provision of their employee to act as director. In such circumstances it is difficult to see that the employee of the consultancy firm is “mandating the income” to their employer. In addition, is there any remuneration from the office paid to the office holder by the client company? If so, how much of the payment to the consultancy firm relates to the office holder, particularly where the employee is carrying out many other functions for his/her employee and his/her remuneration bears no relation to the fee from the client company? The situation is further complicated where other services are provided by the director.
The briefing is helpful in clarifying Revenue’s view in relation to the application of PAYE to the more straightforward arrangements where an individual is personally entitled to a director’s fee.
However, care should be exercised when applying the principles of the briefing to more complex arrangements as, depending on the particular facts, PAYE may not necessarily apply in all cases. It is important to examine the specific arrangements in place to ensure PAYE applies only to the relevant income from the office.
Seamus Hand is a tax partner and Ted McGrath is a tax director in KPMG.