The taxation of company directors
Company directors are afforded special status in law in Ireland. They are subject to special tax filing requirements and to restrictions when entering into certain corporate transactions. These include:-
An Irish directorship is an 'office' and therefore income derived from the provision of services as a director is taxable in Ireland.
The relevant company must withhold income tax, PRSI and USC on the director’s earnings, as and when they are paid.
Director’s fees are paid to a person for duties performed solely in the capacity as a company director.
As a consequence the payment of fees in lieu of salary has no impact on the tax position and fees are liable to income tax, PRSI and USC.
Company directors must submit an annual tax return even where all income has been taxed at source under the PAYE system.
There are exceptions to this general rule for non-proprietary and unpaid directors.
Compliance is critical as late or unfiled returns are subject to a surcharge (up to 10%). This surcharge is calculcated on the person's liabiltiy before any credit for tax already deducted under PAYE.
The obligation to deducted taxes under PAYE applies to non-Irish resident directors. This is because a directorship is an 'office' and income therefrom is taxable regardless of the location of the director or where the duties are performed.
Directorship salary and fees are taxable in Ireland even where the director is resident in another jurisdiction and may not physically perform any duties in Ireland.
In some cases liabiltiy to Irish income tax is relieved under the terms of a Double Taxation Agreement. Liabiltiy to tax may be avoided through, for example, a "hybrid employment arrangement".
The rates of PRSI for individuals is usually around 4% and for companies around 11.05%. The level of exposure is determined by the applicable PRSI 'class'.
Persons with a "controlling interest" are subject to PRSI Class ‘S’. Only the individual contribution is due under this class. The term controlling interest can apply to shareholdings of less than 50%. Establishing the correct PRSI class can be difficult when dealing with SME and family companies.
Other directors are normally insurable under Class ‘A’. The director is treated as ‘an employed contributor’ and both the person and the company must make PRSI contributions.
Exposure to PRSI can be avoided if the person is non-Irish resident and holds a valid "A1 Certificate of Coverage".
Many directors pay themselves through dividends. A tax of 20% will be deducted at source, but you will be liable for further taxes if you are in the higher tax bracket. PRSI and USC are also due on the gross dividend and will be collected through the self-assessment system.
It may disadvantage the company by paying yourself in dividends, as no corporation tax relief will be available to the company, due to dividends being paid out after-tax profits. Also, the company will be required to pay ‘Dividend Withholding Tax’ at 20% on any dividend payment made.
Dividend payments are not included for pension funding calculations. They are also not taken into account for your years’ service either.
The more service you have in employment, the more pension funding you are permitted.
Tax law requries an independent valuation to support certain asset transfers between a company and a director.
Certain transactions (usually involving disposals of shares or goodwill) may trigger income tax exposures even if they appear to be capital in nature.
Where a director borrows money from a close company and the debt is outstanding at year end, the company is required to gross up the payment by 20% and make payment of withholding tax to Revenue.
Where a director lends money to his company and charges an interest rate on the loan, the receipt of such income is chargeable to income tax. At a corporate level, the interest paid to the director is likely to be treated as a non-tax deductible