Fringe Benefits: Chapter 1 – Background

Chapter 1 – Background


“Fringe Benefit” means any benefit provided or deemed to be provided by reason of an employment or office. The basis for the taxation of fringe benefits is article 4(1)(b) of the Income Tax Act, which applies to all gains or profits derived from an employment or office, regardless of whether they are received in cash or in kind and whether they are received in terms of the normal conditions of the contract of service or by way of a special or ex gratia allowance. Similarly, when a payment or other benefit represents a reward for services rendered by a person it is taxable not only when it is provided directly from the employer to the employee but also when it is provided indirectly, that is either by third parties or to third parties.

Although fringe benefits have the nature of normal income they have certain characteristics which warrant special regulation that seeks to:

  • ensure that no doubts are raised as to the taxation of fringe benefits,
  • establish in which circumstances and to what extent are benefits to be treated as fringe benefits,
  • determine their value, and
  • provide for the manner in which the Final Settlement System is to apply to fringe benefits.

Once fringe benefits are taxable in the same way as normal salaries and wages, an employer who incurs a cost in providing fringe benefits may claim that cost as a deduction from his income to the same extent as he would qualify for a deduction in terms of the normal provisions of the Income Tax Acts had he paid, instead, normal wages.


This guide refers to fringe benefits provided to employees and persons holding, or deemed to hold, an office. This fact however is not to be taken to mean that the law discriminates against employees and directors. Payments in kind for services rendered by a self-employed person are equally taxable but the manner in which they are to be valued and accounted for is not regulated by these guidelines.

The provision of benefits by an employer to an employee applies equally to the provision of benefits:

  • by a company or a partnership to an officer (including persons in a controlling position of a company and partners in a company), or
  • by a company to an employee or officer of an associated company, or
  • by third parties as a reward for services rendered in an employment or office, or
  • to a member of the family or of the household of the employee or officer.

References in these guidelines to employer and employee are to be construed accordingly, saving the context in which the reference is made.


Employees are persons who perform services under a contract of employment, whether that contract is express or implied, and whether on a full or part-time basis. These guidelines also apply to fringe benefits provided to a person who has ceased to remain an employee by reason of his/her past employment.


The term office is given a very wide meaning. It applies to:

  • directors of a company
  • persons who perform functions similar to those of company directors, even though they may be called by another name
  • persons on whose instructions the directors of a company are accustomed to act
  • persons who are in a controlling position of a company
  • partners of a civil or commercial partnership (other than a commercial partnership that is covered by the definition of “company”)
  • persons (other than persons mentioned above) who hold an office.

Controlling position

A person is in a controlling position of a company if he is a shareholder holding more than 5% of the voting rights or of the ordinary shares of that company.

Persons who have ceased to be in employment or to hold an office

When a person who was in employment receives, or continues to receive, a benefit by virtue of his past employment, that benefit is taxable as a fringe benefit. The same principle applies to persons who cease to hold an office.

When a benefit in these circumstances is provided by way of a pension it will be valued in accordance with these guidelines but will be taxed as a pension under article 4(1)(d).


Benefits provided in the following circumstances are presumed to be provided by virtue of an employment or office:

  • benefits provided by employers to their employees
  • benefits provided by companies and partnerships to their officers (as defined above)
  • benefits provided by an employer to a company owned by an employee

An exception to this presumption applies only when it results that:

  • the benefit is purely a personal donation, or
  • it is paid in settlement or on account of a debt that is not connected with the employment or office, or
  • it falls to be treated as a dividend in terms of the relevant provisions of the Income Tax Act, or
  • the benefit consists in drawings made by a partner on account of his share of profits and accounted as such in the records of the partnership.

When it results that a benefit is a reward for services rendered in an employment or office it will be treated as a fringe benefit without the need to apply the above presumptions, and will consequently be taxable even when provided by third parties.

Associated company

A benefit provided by a company (A) to an employee or officer of an associated company (B) is deemed to be provided by virtue of the employment or office as if it were paid by B. Two companies are associated if –

  • they form part of a group as defined in the Income Tax Act, or
  • more than fifty percent of the voting rights or of the ordinary shares are held directly or indirectly by the same persons.

Members of the family or of the same household

When a benefit is provided to a member of the family or of the household of a person who is in employment or holds an office it is treated as if it were provided to that person. If the provider is the employer of that person, or a company or partnership in which that person holds an office, the presumptions referred to above will apply. An exception to this rule will of course apply if it results that the member of the family or the household received that benefit in his or her own right.

“Members of the family” of a person are that person’s spouse, ascendants and their spouses, children and their spouses, adoptive sons and daughters and their spouses and members of the same household. “Members of the same household” of a person are those persons who ordinarily reside in the same residence – whether related or not to him/her.

Example – Directors and relatives

If a director of a company is given a company car then that car is deemed to be a taxable fringe benefit. If a director’s wife, son, daughter, mother etc uses a company car, the use of that company car is also considered a fringe benefit. However, if the relative enjoying the use of that fringe benefit is not in the employ or an officer of the company then the use of the car by the relative will be deemed to be a fringe benefit provided to the director. The same applies also where the car is not owned by that company but by its parent or another associated company.


Beneficiaries who fail to declare the fringe benefit will be liable to additional tax for omission as contemplated by the Income Tax Acts (minimum 3% per month of the endangered tax until the omission is rectified). Employees who are eligible to file a simple declaration need not declare the fringe benefits as these would have been already included in the FS3 provided by their employer.

Employers who fail to report the fringe benefits properly and in time will be subject to penalties.


Any person who provides fringe benefits to his employees and any company or partnership that provides fringe benefits to its officers, even though it may not have any employees, is considered to be an employer by the Inland Revenue Department. Such persons, companies and partnerships are therefore to register as employers with the Inland Revenue Department and must obtain a PE number to enable the lodgement of FS3, FS5 and FS7 documents as required.


The word “remuneration” or “emoluments” appearing in this document means any kind of compensation for services rendered. It includes salary, wages, fees, overtime pay, leave pay, bonus, commission, perquisites, tips, benefits in kind, expenses payments and allowances.


The reduced rate of tax of 15% does not apply to fringe benefits received from a part-time employment.

If an employee qualifies for the 15% tax on part-time emoluments, and he/she is also in receipt of fringe benefits, the value of the benefits (even if these consist of a car cash allowance) do not qualify to be taxed at the 15% part- time rate. In such cases the fringe benefit value shall not be taxed at source and it is to be reported separately from the part-time income on the same FS3 inside the relative fringe benefit boxes. It is also to be pointed out that the value of the fringe benefit in such cases is not considered to constitute part of the Lm3000 maximum ceiling that qualifies for the 15% rate.


Whenever a fringe benefit is shared between two or more beneficiaries, each beneficiary will be apportioned with his ‘share’ of the fringe benefit which is to be brought to charge and with any tax due thereon withheld by the provider.


All cash allowances paid to employees, with the exception of cash allowances paid in respect of the use of employee- owned cars for business purposes, are fully taxable. There are no cash allowances that are exempt from income tax. The tax treatment of cash allowances paid in respect of the use of employee-owned cars for business purposes is described later in this guide.