When a Foreign Company Holds Directors' Meetings in the U.S. – Tax Treaty Issues for Nonresident Aliens

By Thomas St.G. Bissell

Celebration, FL

This author's previous commentary discussed the tax implications for U.S. persons (i.e., U.S. citizens and resident aliens) and nonresident aliens who attend a foreign company's board of directors' meeting in the United States, where neither the foreign company nor the nonresident aliens are resident in a country having an income tax treaty with the United States. This commentary discusses the U.S. income tax issues that arise where the foreign corporation that holds a meeting in the United States is resident in a tax treaty country, and where one or more of the nonresident aliens who attend the U.S. board meeting are also resident in a treaty country (although not necessarily the same treaty country). A subsequent article will discuss the treaty rules that apply to U.S. citizen and resident alien directors.

Prior to 1996, the U.S. Treasury's "model" income tax treaty (dated 1981) did not mention directors' fees. Therefore, because individual directors of a corporation are classified as self-employed independent contractors for U.S. income tax purposes,1 it was generally assumed that the United States had the right to tax a nonresident alien resident in a treaty country on fees for attending U.S. board meetings only if he had either a "fixed base" or a "permanent establishment" in the United States.2 In 1996, however, the U.S. Treasury revised its model treaty to provide in effect (in Article 16) that where a resident of one of the treaty countries attends a board meeting in the other country of a company resident in that country, his director's fees may be taxed by that other country. This rule was retained in Article 15 of the Treasury's (revised) model income tax treaty published in 2006.3

Although the new rule clearly permits the United States to tax treaty country residents who attend board meetings of U.S. companies within the United States, it does not apply where the treaty country resident attends a board meeting in the United States of a non-U.S. company (whether that non-U.S. company is also resident in the same treaty country, or in a third country). The Treasury's Technical Explanation states that the rule in Article 15 of the 2006 model treaty is an exception to the more general rules of Article 7 (Business Profits).4 Thus under the 2006 model treaty it appears that where a nonresident alien who is resident in a treaty country attends a board meeting in the United States of any non-U.S. company, the "traditional" (pre-1996) rules will continue to apply, and the nonresident alien director will only be subject to U.S. tax if he is considered to have a "permanent establishment" in the United States to which the director's fees are attributable as "business profits", or (if the treaty that applies to him also has an Independent Personal Services article), if he has a "fixed base" to which his director's fees are attributable.5

In contrast with the 1996 and 2006 U.S. model treaties, Article 16 of the OECD model treaty provides that director's fees derived by a resident of one of the treaty countries from attending a board meeting of a company resident in the other country may be taxed by that other country, regardless of where the meeting is held.  Thus, the treaty country where the company is resident may tax the individual resident of the other treaty country whether the meeting is held in either of the two treaty countries, or in a third country.  Under the OECD rule, therefore, if a U.S. resident individual attends the board meeting of a company that is resident in the (foreign) treaty country, that country may tax the U.S. resident on his director's fees no matter where the meeting is held. The Treasury's commentary to the 1996 and 2006 U.S. model treaties specifically mentions the OECD model and notes that the rule in the U.S. model treaty (which requires the board meeting to be held in the same country where the corporation is resident) was a "compromise" between the very broad OECD rule – to which the United States had entered a specific reservation – and the much more restrictive rule of the previous (1981) U.S. model, which permitted a treaty country to tax a director resident in the other country only if he had a "fixed base" or "permanent establishment" in the country where the meeting was held.

The rule of the 1996 and 2006 model treaties has been included in a number of tax treaties that the United States has ratified since the early 1990s, and particularly with some of the United States' major trading partners.6  

However, several treaties have also included the language of the OECD model, notwithstanding the United States' preference for the narrower rule of the U.S. model. Thus, Article 16 of the Swiss treaty provides that director's fees derived by an individual resident of one of the treaty countries who attends the board meeting of a company resident in the other country may be taxed by that other country, regardless of where the meeting is held. This means that a U.S. resident who attends the board meeting of a Swiss resident company may be taxed on his director's fees by Switzerland, whether the meeting is held in Switzerland, in a third country, or even in the United States.  It also means that director's fees derived by a Swiss resident who attends the board meeting of a U.S. resident company may be taxed by the United States no matter where the meeting is held.

However, if a Swiss resident company holds a board meeting in the United States, the "OECD rule" gives no specific guidance on the right of either country to tax an individual director who is not a U.S. resident. Presumably a Swiss resident individual who attends the board meeting in the United States will be subject to Swiss tax on his director's fees under internal Swiss law, and U.S. tax will be determined on the "traditional" (fixed base/permanent establishment) rule of the pre-1996 U.S. model.  The U.S. Treasury's Technical Explanation strongly implies this, albeit in discussing a different fact pattern.7 Very interestingly, the U.S. Treasury's Technical Explanation of the identical (OECD) language in the Icelandic treaty states that in the reverse situation — where Article 15 of the Icelandic treaty gives the United States the right to tax a resident of Iceland who attends a board meeting in Iceland of a U.S. resident company – the United States would not impose tax on the individual's director's fees because internal U.S. law does not tax non-U.S.-source service fees of a nonresident alien individual.

At least two treaties adopt a "hybrid" position between the OECD model and the U.S. model. The Irish and Mexican treaties in effect permit the country where a corporation is resident to tax directors' fees paid by that company to individual residents of the other country for attending the company's board meetings that are held either in its country of residence or in a third country, but not in the country where the director is resident. Thus, if an Irish company holds a directors' meeting in Ireland or in a third country, Ireland may tax fees paid to U.S. resident directors, but not if the meeting is held in the United States. As is true of the Swiss treaty and other treaties that follow the OECD model, the treaty gives no specific guidance on how to determine whether the United States may tax an Irish resident who attends the U.S. board meeting of an Irish company, but presumably the "fixed base" rules would apply.8

Where a company that is resident in a country whose treaty either follows the OECD model (such as the Swiss treaty) or takes a "hybrid" position (such as the Irish treaty), the same question arises with respect to the taxability of a nonresident alien who is not resident in that particular treaty country, but instead is resident in a third country (which may or may not have an income tax treaty with the United States). In that situation, as is true where the U.S. board meeting is held by a company whose treaty with the United States follows the U.S. model, taxability of that particular director would be determined under the treaty between the United States and the country where he is resident, or if none, then under the provisions of the Code. For example, if a U.K. resident individual attends a board meeting in the United States of a Swiss company or an Irish company, the United States' right to tax him would depend on the provisions of the U.S.-U.K. treaty.9 If he is resident in a treaty country and wishes to take the position that he is exempt from U.S. tax on his director's fees, he should follow the applicable IRS procedures to claim the exemption.10 If the total U.S.-source portion of the treaty-exempt directors' fees exceeds $10,000 for the year, he must also complete IRS Form 8833 and report the amount of the payments to the IRS or risk penalties under §§6114 and 6712.11 If he is not a resident of any tax treaty country, he would usually be subject to U.S. tax on his director's fees under the general rules of the Code (§§861(a)(3), 864, and 871).12

This commentary also will appear in the November 2011 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Williamson, 943 T.M., U.S. Income Tax Treaties — Provisions Relating Only to Individuals, and in Tax Practice Series, see ¶7160, U.S. Income Tax Treaties.


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

  2 Where a tax treaty contains both an Independent Personal Services article (which permits the source country to tax only if the service fees are attributable to a "fixed base") and a Business Profits article (which permits the source country to tax only if the service fees are attributable to a "permanent establishment"), and where the treaty does not contain an article on Directors' Fees, the U.S. Treasury's view seems to be that the "fixed base" rules are applied. See, for example, the Treasury's Technical Explanation of Article 16 of the Swiss treaty. Where the treaty does not contain an article on Independent Personal Services – as is true of many treaties ratified in the past 20 years – and where the treaty also does not contain an article on Directors' Fees, the Treasury's view is that the rules in the Business Profits and Permanent Establishment articles are applied. See the Treasury's Technical Explanation of Article 15 of the U.K. treaty. The principal reason why the Independent Personal Services article has been eliminated from many renegotiated treaties is apparently because the Treasury believes that the "fixed base" and the "permanent establishment" rules are virtually identical. See the Treasury's Technical Explanation of Article 7.1 of the U.K. treaty. Where it is necessary to determine whether a nonresident alien director has either a "fixed base" or a "permanent establishment" in the United States, the principal treaty question is whether the company's "board room" in the United States is classified as a "fixed base" or as a "permanent establishment" with respect to the nonresident alien director, and whether his director's fees are "attributable" to that fixed base or permanent establishment. See Bissell, 916 T.M., International Aspects of U.S. Income Tax Withholding on Wages and Service Fees, at VI, G, 1.

  3 The reason why this provision appears in Article 16 of the 1996 model and in Article 15 of the 2006 model is because Article 14 of the 1996 model contained the rules on Independent Personal Services. However, Article 14 was deleted from the 2006 model.

  4 Because the Treasury's 2006 model does not include an Independent Personal Services article, the right of the source country to tax a self-employed individual who is resident in the other country is based entirely on application of the Business Profits and Permanent Establishment articles.

  5 See the discussion in footnotes 2 and 3, above.

  6 See, e.g., Article 16 of the French treaty (effective 1/1/96), Article 16 of the German treaty (effective 1/1/91), and Article 15 of the U.K. treaty (effective 1/1/04).

  7 The Treasury's Technical Explanation of the Swiss treaty states that where a Swiss resident attends the board meeting of a U.S. company in the United States, "it is not relevant [under Article 16] to establish whether the fee is attributable to a fixed base" in the United States. This language is based on the fact that the Swiss treaty still contains an Independent Personal Services article, and the Treasury's view is that if a treaty contains both an Independent Personal Services and a Business Profits article but no Directors' Fees article, taxation by the source country is based on the rules in the Independent Personal Services article.  Presumably, therefore, where a Swiss resident attends a board meeting in the United States of a company that is not a U.S. resident company, the Independent Personal Services article would be applied.  Similar language is included in the Technical Explanation of other treaties that contain the OECD rule on Directors' Fees as well as an Independent Personal Services article – for example, Article 16 of the Latvian treaty and Article 16 of the Lithuanian treaty.  Similar language is also included in the Technical Explanation of Article 15 of the Icelandic treaty and Article 15 of the Japanese treaty (which do not contain an Independent Personal Services article), but with reference to the Permanent Establishment/Business Profits articles in those two treaties.

  8 Because the Irish treaty still contains an Independent Personal Services article, the provisions of that article would be applied in this situation, rather than the Business Profits/Permanent Establishment articles. This conclusion is strongly implied by the Treasury's Technical Explanation of Article 16 of the Irish treaty. The same rules would be applied under the Mexican treaty, which also contains an Independent Personal Services article. See the Treasury's Technical Explanation of Articles 14 and 16 of the Mexican treaty.

  9 Whether either Switzerland or Ireland could tax the U.K. resident on his director's fees would depend on the provisions of the U.K.-Switzerland and U.K.-Ireland treaty.

  10 See 916 T.M. at VI, D, 4, d. The procedures principally involve the timely completion of IRS Form 8233.

  11 See Regs. §301.6114-1(c)(2).

  12 See Bissell, "When a Foreign Company Holds Directors' Meetings in the United States," 40 Tax Mgmt. Int'l J. 528 (9/9/11).