When a Foreign Company Holds Directors' Meetings in the United States

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By Thomas St.G. Bissell, Esq.

Celebration, FL


Anecdotal evidence suggests that foreign companies – especially foreign subsidiaries of U.S. companies – are increasingly holding their board of directors' meetings within the United States.  This commentary summarizes the principal U.S. income tax reporting and compliance issues that apply with respect to the three categories of individuals to whom a foreign company pays directors' fees – U.S. citizens, resident aliens, and nonresident aliens. (Because the rules for U.S. citizens and resident aliens are essentially identical, those two categories will be referred to as "U.S. persons.") It is assumed that no income tax treaty applies (although a future commentary will discuss the very interesting tax treaty implications in this area).

The payor of the directors' fees (i.e., the foreign corporation) will need to make a determination concerning the U.S. income tax status of each individual director – in other words, whether the individual is a U.S. person or a nonresident alien. Assuming proper documentation is requested and received from all of the U.S. directors, the payor will only be required to report the directors' fees for those individuals on IRS Form 1099. With respect to fees paid to nonresident alien directors, however, 30% withholding will be required under §1441 on part or all of the fees.

In determining which directors are U.S. persons and which are nonresident aliens, the §1441 regulations contain several presumptions based on documentation provided by the payee to the payor, and on any actual knowledge that the payor has concerning the payee.1 Because the payees in this instance will be individuals who are intimately involved with the company's affairs rather than occasional independent contractors, the company will usually have actual knowledge of each payee's status. In order to minimize potential problems vis-a-vis the IRS, however, the company should request each director to complete either Form W-9 (completed by U.S. citizens and resident aliens) or Form W-8BEN (completed by nonresident aliens). Assuming that the payor has no reason to believe that any of the information provided to it is incorrect, in most cases it would be entitled to rely on this information in doing the necessary compliance with respect to each director.

With respect to the U.S. directors, the Form W-9 that the payor receives from each of them will include the director's social security number and other relevant information so as to exonerate the payor from doing the 28% backup withholding that is otherwise required under §3406(b)(3)(A) where a payor does not receive this information from a U.S. payee. After the end of the year, the payor will then provide both the payee and the IRS with Form 1099 no later than January 31, and it will also file a transmittal Form 1096 with the IRS.2

With respect to the nonresident alien directors, because the IRS treats directors as self-employed independent contractors as not as employees subject to regular wage withholding tax,3 30% withholding on the U.S.-source portion of the director's fee must be withheld and deposited with the IRS under §1441.4 This is true even though in almost all situations the director's fee will be classified as income that is "effectively connected" with a U.S. trade or business (ECI) in the hands of the nonresident alien director, with the result that the alien will be required to file Form 1040NR after the end of the year in order to calculate the correct amount of his income tax on the fee, and either claim a refund for any overwithholding or pay any additional amount that is due in the event that there was underwithholding.5 The payor is required to deposit the withheld taxes with the IRS at prescribed intervals together with Form 8109, and the payor must file duplicate Forms 1042-S with the nonresident alien payee and the IRS on or before March 15 of the following year, as well as a transmittal Form 1042 with the IRS.6 Thus, these rules are similar to the Form 1099/1096 filing requirements with respect to U.S. payees.

In determining the U.S.-source portion of the director's fee, §861(a)(3) contains a de minimis exception which in some situations may exempt the fee from §1441 withholding.  The "three-pronged" test of §861(a)(3) provides that: (1) if the nonresident alien is present in the United States for not more than 90 days in the taxable year; (2) if the fees for work done in the United States do not exceed $3,000; and (3) in the case of self-employment income such as directors' fees, if the fees are received under a contract with a foreign corporation that is not engaged in a U.S. trade or business (ETBUS), then the income realized by the nonresident alien for his services is foreign-source income, and is exempt from U.S. income tax under §§864(b)(1) and 871.7 In most cases, however, the director's fee will exceed $3,000, so that test (2) will not be satisfied. Even if both tests (1) and (2) are satisfied, it can be argued that the holding of a board of directors' meeting in the United States could render the foreign corporation ETBUS, so that test (3) would not be satisfied.

Assuming that the director's fee does not satisfy the §861(a)(3) exemption, the foreign corporation must determine the portion of the fee that is U.S.-source income, i.e., the portion that is payment for services performed within the United States.  In almost all situations the individual director will spend time preparing for the meeting by reviewing documentation that will be discussed at the meeting, and often in gathering and reviewing additional information about the company and its affiliates. To the extent that some or all of this preparatory work is done by the nonresident alien director outside the United States, it can be argued that a portion of the director's fee is foreign-source and thus exempt from both substantive tax liability under §871(b) and from withholding at source under §1441.  If the foreign company wishes to treat some of the director's fee as foreign-source as an accommodation to the individual director, however, it will often have no actual knowledge of how much time the individual actually spent in foreign preparation time, so that it will have to rely on statements from the individual himself. Unfortunately, there are no provisions in the §1441 regulations that permit the payor to rely on any such statements, and thus avoid liability for additional tax and interest and penalties in the event the IRS successfully challenges the allocation.8 Perhaps in order to encourage payors to be as conservative as possible, §1461 specifically provides that the payor of income to a nonresident alien is "indemnified against the claims and demands of any person" if overwithholding under §1441 occurs because the payor was overly cautious.


Although the source-of-income regulations generally provide that service fees should be allocated between U.S. and foreign sources on the basis of time spent by the payee, in 2007 the IRS proposed regulations that would require that, where an individual is paid to perform services at a particular "event," preparation time in most cases should be ignored.9 Although the examples deal primarily with athletes and entertainers who are paid to appear at a particular sporting event or concert, the IRS also includes the example of a speaker who is paid to give a "presentation" in a public forum.10 These rules, if they become final, could probably be applied just as easily to fees that are paid to an individual to appear at a board of directors' meeting. This proposed rule offers an additional incentive for the foreign corporation to treat the entire fee for attending a board meeting in the United States as U.S.-source, and thus to withhold 30% on all of it. If the nonresident alien payee wishes to treat part of the fee as foreign-source in order to reflect preparation time, he can take that position when he files his Form 1040NR for the year, and claim a refund for the appropriate portion of the tax that was withheld at source. The discussion of the issue (if any) would then take place only between the IRS and the nonresident alien director, and the foreign corporation payor would not be involved.

In addition to compliance with the U.S. §1441 withholding rules, the payment of directors' fees to nonresident aliens (and possibly to some or all of the U.S. directors) could be subject to state income tax withholding, as well as substantive state income tax liability in the hands of all the directors (both U.S. and non-U.S.) under the laws of one or more states. Fees paid to the U.S. directors are also subject to the U.S. social security tax on self-employed individuals (so-called "SECA" tax), but because nonresident aliens are never subject to SECA, the fees paid to the nonresident alien directors will be exempt from SECA.11  

Particularly where a foreign corporation holds a board meeting within the United States, it is likely that the company will reimburse some or all of the directors (especially nonresident aliens traveling from their home country to the United States) for some or all of their travel expenses. Assuming that the director is considered to be away from his "tax home" and that the expenses are expected to be deductible by the director under §162, the expenses would be exempt from §1441 withholding and also exempt from reporting on Form 1042-S if they are paid pursuant to an "accountable plan" in accordance with the IRS rules.12 To the extent that they do not satisfy those rules, however, they are subject to 30% withholding, but if they are properly deductible by the nonresident alien director, he could claim a deduction for those expenses on his Form 1040NR for the year. Thus, he might receive a refund of some or all of the tax that was withheld on them.

Assuming that the nonresident alien payee does not have a U.S. social security number, he will usually be required to obtain an "individual taxpayer identification number" (ITIN) in order to complete Form W-8BEN, and also in order to file Form 1040NR after year-end so as to "true up" his correct U.S. income tax for the year. The question arises whether the foreign corporation must also obtain a taxpayer identification number (TIN) to show on the forms that relate to U.S. payees (Forms 1099 and 1096), and also on the Forms 1042-S/1042 with respect to nonresident alien payees. The Treasury regulations require that a "foreign person" show a TIN on any forms or returns filed by it if it is ETBUS at any time during the taxable year, or if it has a "U.S. office or fixed place of business.13 Although it can be debated whether the holding of a board of directors' meeting in the United States renders a foreign corporation ETBUS, because the company must file separate forms with the IRS with respect to each separate director, it may be prudent for the company to obtain a TIN so as to reduce the risk of a potential IRS inquiry concerning why its Forms 1099/1096 and Forms 1042-S/1042 do not show a payor-TIN14 — an inquiry which could in turn lead to an inquiry as to whether the company is ETBUS.

Apart from the question of whether the foreign corporation is required to obtain a TIN, the ETBUS issue is clearly much more important in considering whether the holding of one or more directors' meetings in the United States in itself could potentially expose the foreign corporation to U.S. income tax under §882, and possibly also to potential corporate income tax under the laws of one or more states. This issue will also be discussed in a subsequent commentary.

This commentary also will appear in the September 2011 issue of the Tax Management International Journal.  For more information, in the Tax Management Portfolios, see Blessing and Lubkin, 905 T.M., Source of Income Rules, Bissell, 907 T.M., U.S. Income Taxation of Nonresident Alien Individuals, and Bissell, 916 T.M., International Aspects of U.S. Income Tax Withholding on Wages and Service Fees,  and in Tax Practice Series, see ¶7120, Foreign Persons—Gross Basis Taxation and ¶7130, Foreign Persons—Effectively Connected Income.


1 Regs. §1.1441-1(b), discussed in Bissell, 916 T.M., International Aspects of U.S. Income Tax Withholding on Wages and Service Fees, at VI.B.4.

2 Regs. §1.6041-6.

3 Rev. Rul. 72-86, 1972-1 C.B. 273; Rev. Rul. 68-595, 1968-2 C.B. 378.

4 If the director's fee were arguably exempt from U.S. tax under an income tax treaty, §1441 withholding could usually be avoided, provided that the payor received the appropriate documentation from the nonresident alien payee.

5 See the detailed discussion of these rules at 916 T.M. at VI.B.2.

6 See 916 T.M. at X.C.

7 See 916 T.M. at VI.D.4.a.

8 See the discussion in 916 T.M. at VI.B.4.

9 Prop. Regs. §1.861-4(c), discussed in Bissell, 907 T.M., U.S. Income Taxation of Nonresident Alien Individuals, at XI.C.

10 See Prop. Regs. §1.861-4(c), Ex. 7.

11 See §1402(b), discussed in Bissell, 917 T.M., International Aspects of U.S. Social Security and Unemployment Taxes, at VI.B.

12 Regs. §1.162-17. See IRS Publication 463 at 32, which explains that the "accountable plan" rules can apply to independent contractors (such as directors) as well as to employees.

13 Regs. §301.6109-1(b)(2)(i) and (ii).

14 The foreign corporation would obtain a TIN by filing Form SS-4 with the IRS.

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