Authors: Stephanie Aquilina Galea – Tax supervisor, Jade Micallef – Senior Tax Accountant, Maria Spiteri Purkiss – Tax Accountant

Date: 12th April 2021

Director Fees – Tax and VAT Implications

Have you ever considered the income tax and VAT treatment of a director and more so, whether such treatment differs between Maltese tax residents or otherwise? The objective of this article is to highlight the salient features relative to the income tax and VAT considerations in respect of directors’ fees.

Income Tax Considerations relating to Directors’ fees

By virtue of Article 4(1)(b) of the Income Tax Act (ITA) tax is chargeable on income in respect of “gains or profits from any employment or office including the value of any benefit provided by reason of any employment or office”. Gains or profits which are taxed in terms of the said article include, inter alia, director’s fees.

For Maltese income tax purposes, director’s fees are arise in the country where the services rendered to the company in question is managed and controlled. This means that directors’ fees derived by a person for services provided to a company which is managed and controlled in Malta are said to be arising in Malta.   Therefore, such fees are taxable in Malta regardless of where such director is resident for tax purposes.

The approach of the Maltese Tax Authorities is the same  position adopted by the Organisation for Economic Cooperation and Development Model Tax Convention (‘OECD MTC’) whereby Article 16 thereof prescribes that “Directors’ fees and other similar payments derived by a resident of a Contracting State (say State A) in his capacity as a member of the board of directors of a company which is a resident of the other Contracting State (say State B) may be taxed in that other State (State B).” However, one should note that Contracting States might decide to take a different position adopted by the OECD MTC. Therefore, the binding document between Contracting States is not the OECD MTC but the double taxation agreement in force between the two Contracting States. For example, the Malta-Poland DTA amended recently by virtue of L.N. 64 of 2021 denotes that where Polish tax resident directors sit on the board of a Maltese tax resident company, exclusive taxation is granted to Poland as the resident State of the directors and thus, Malta, does not have the right to tax the director’s fees.

Further, the Commentary to Article 16 of the OECD MTC also clarifies that directors’ fees refer to fees and similar payments received in the capacity of the person acting as a member of the board of directors and does not include emoluments relative to other services provided to the company such as advisory services, employment amongst others.

Director’s fees – practical implications

Director fees payable to an individual director, whether said director is tax resident in Malta or not, for directorship services rendered to a company which is managed and controlled in Malta, will be included as part of that individual’s total emoluments and taxed in accordance with the Final Settlement System (FSS) Rules at the applicable progressive rates of tax.

On the other hand, when a director is a corporate director rather than an individual, director fees will be part of the corporate director’s revenue and will be subject to tax at the Maltese corporate tax rate of 35%.

Nonetheless, a Maltese tax resident individual or corporate director rendering services to a company which is effectively managed and controlled outside Malta should consider their tax implications, if any, in the jurisdiction where the company in question is effectively managed and controlled. In such circumstances, Malta, as the resident state of the director, may still have the right to tax, however, this very much depends on the applicable tax treaty if any, between Malta and the country where the company is managed and controlled.

Non-Maltese tax residents on the other hand are subject to tax in Malta on Malta-sourced income, that is, income arising in Malta subject to the applicable double tax treaty in force.

VAT Considerations relating to Directors’ fees

In terms of article 5 of the VAT Act, the activities of an ’employee’ which, by definition includes the ‘holder of an office’, are not regarded as an economic activity for VAT purposes. In this respect, where an individual is appointed to the post of director of a company, the fees paid by the company to the director by way of remuneration for his/her activities or ‘services’ would typically fall outside the scope of Maltese VAT.

The main principle of VAT is to charge VAT on supplies of goods or services when the supply is made by a taxable person acting as such.  All activities carried out by a non-taxable person falls outside scope for VAT purposes.  The activities of a holder of an office are not considered as an economic activity for VAT purposes and therefore any remuneration received by the latter in consideration of his/her functions fall outside the scope of VAT.

The VAT treatment of supply Directors

There are scenarios whereby the individual holding an office (i.e. the director) is not remunerated directly, and in his/her own name, for the said activities.  These would include:

  • Where a corporate services provider or other service provider makes available, to its client company, an individual to sit on the board of directors of the client company; or
  • Where a director’s remuneration is paid to another company of which the director is a shareholder.

Up until very recently, it was generally considered that fees paid in both of the above mentioned circumstances fall outside scope of Malta VAT.  This, on the basis that the said fees constitute remuneration for an activity which is not to be considered as an economic activity for VAT purposes, that is, ‘holder of an office’.

Further to the CJEU judgement C-94/19 (San Domenico Vetraria SpA vs Agenzia delle Entrate), the above mentioned interpretation has been challenged since the judgement has reaffirmed that the lending or secondment of staff by one company to another (including the services of a director) with fall within the scope of VAT and would thus be taxable.

As a result of the judgement, in practice, when a company charges another company for the provision of an individual to sit on the board of the latter company, the transaction should be treated as an economic activity and therefore falling within scope of VAT and subject to the normal VAT rules.

Corporate Directors

In instances whereby a director of a company is a corporate director (and thus not an individual), one may conclude that the activities carried out by the said corporate director are activities falling within the scope of VAT.  The exclusion relating to the activities of the holder of an office in terms of Article 5 of the VAT Act specifically refers to an ‘individual’, and therefore a corporate director cannot be regarded as an ‘employee’ for the purposes of the said Article 5.


Pursuant to the above insight, we hope that the main aim of this article is now more fulfilled and therefore, all readers particularly directors, have now a better understanding on the income tax and VAT considerations relative to directors’ fees.

For further information and assistance, please contact us:

Maria Spiteri Purkiss – Tax Accountant +356 25 990 647