Withholding requirements for nonresident directors' fees.

• Author: Galuppo, Christopher

Multinational corporations are taking advantage of worldwide expertise to adapt to the changing economic landscape. Corporations frequently have foreign nationals on their boards of directors. This item will assist U.S. companies and/or tax professionals dealing with the taxation of such directors.

Cross-Border Example

A resident of a foreign country attends a board meeting in the U.S. as a board member of a U.S. company. The fee received for such services is subject to U.S. tax, because the services were performed in this country.

Generally, under Sec. 871(a), every nonresident alien (NRA) who derives fixed or determinable annual or periodic (FDAP) income from sources within the U.S. (including remuneration for personal services) is subject to U.S. tax on such income. Further, under Sec. 1441(a) and (b), every U.S. person that makes FDAP payments to NRAs is required to withhold the proper tax and remit it to the IRS. The withholding rate on such income is generally 30%; however, it may be reduced under a treaty between the U.S. and the NRA's resident country, per Regs. Sec. 1.871-12.

Modification by Treaty

When a tax treaty exists between the U.S. and the director's home country, it may specify which country has the right to tax the income. For example, the U.S.-U.K treaty states that a corporation's country of residence may tax nonresident directors only on compensation for services physically performed there; see Convention Between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains, signed July 24, 2001, Art. 15, Director's Fees.

In contrast, according to a treaty with Cyprus, directors' fees received by Cyprus residents for service on the board of a U.S. corporation are exempt from U.S. income tax to the extent of a daily reasonable fixed amount; see Convention Between the Government of the United States of America and the Republic of Cyprus, signed March 19, 1984, Art. 20, Directors' Fees. Thus, no withholding requirement applies in such cases, but certain other reporting requirements must be met.

NRA Withholding Requirements

Once the fees paid for services rendered in the director's capacity as a board member are subject to U.S. tax (i.e., not exempt by treaty), the NRA withholding requirements apply. The company paying the compensation...