US-Source Income

I don't have a definitive answer for you, but here's my thinking on the matter. As a corporate director, I would expect that attendance at board meetings would be required. Attendance via teleconference would be for the convenience of the director and not for the necessity of the corporation. Therefore the services would be performed inside the US, regardless of his physical location. This differs from the situation where the corporation might hire someone internationally to perform some service that can be done anywhere or needs to be done internationally. Of course, my reasoning avoids any consideration of COVID impacts on the rtax treatment. Also, you need to consider any tax treaty provisions that might cover this.

Ira Smilovitz, EA Leonia, NJ

My thought, not necessarily definitively correct, is that the director's services are wages, which are typically referred to a compensation for dependent services in model treaties.

As such, the wages are performed at the physical location(s) of the US Corporation and are then deemed to be performed within the US. Therefore subject to US withholding taxes. (For example, looking at the other directors, what state taxes are withheld from the compensation? That would be where the work is defined as occurring.)

Alternatively, the US Corporation may instead try to define that the director was performing the service within their country, but then that would subject the US Corporation to payroll obligations within the foreign country, and possibly also to sales taxes, corporate taxes, and other regulatory issues, given that the US Corporation then has stated that they have a physical presence in the foreign country. (Most treaties define physical presence as then also conferring tax and other obligations to the foreign country where the physical presence occurs.) Accordingly, it is highly probable that the US Corporation will not find it to the corporation's benefit to attempt to claim that the director is not subject to US withholding tax due to the issues that will happen should they attempt this. Certainly not for a single person.

Since I do not know the country of residence of the foreign director, I would be unable to research further into any treaty modifiers to the situation. I would suggest that you consult with someone familiar with the applicable treaty to determine further refinements and/or modifiers. For example

Thanks Ira. I appreciate that. It makes so much sense.

Thanks.

I believe the country is Belgium. If he takes my advice he'll come back and pay to have someone look into this more, and specifically more into the tax treaty.

A director's services are never wages unless he is also providing services to the corporation as an employee.

I disagree with your answer.

Alas, I do not know what the correct answer is.

I don't have a definitive answer either, BUT, I have always interpreted the code (864 and 871) and its accompanying regulations to mean physical presence in the 48 states and the D.C. whenever it says "engaged in a trade or business in the United States" when dealing with personal service income. Sitting in front of a terminal in Belgium is no different then making a telephone call from Belgium. I don't believe the issue of convenience or necessity enters into the picture. I just don't see how an NRA can have effectively connected personal service income without physically being present in the U.S.

The IRS appears to agree with you. According to one of their publications (I forget which at the moment) directors' fees are considered self-employment income.

Interesting, though, that this article cites nothing at all in support any of its positions.

Below is what it said. The second paragraph tells you that the US company is not required to withhold income tax. If the payment was taxable in the US, then the company would have been required to withhold

Under US law, directors? fees a US company pays to a nonresident alien director who performs director services while in the United States are considered US source income that is subject to US federal withholding tax of 30 percent.

When the same director performs director services for a US company outside of the United States (such as when a meeting is convened outside of the United States or he participates by conference call from outside the country), the portion of fees paid for services performed outside of the United States are not subject to US federal withholding tax. ===========================================================

Yes, of course I read that. But their statement comes out of thin air, not pointing to any supporting document, statute, regulation or anything. Their statement may be true, or it may just be their position based on nothing at all.

See Code sections 864 and 871 and the accompanying regulations. Re NRAs: In order to be taxed you have to perform your personal services within the U.S. The code defines the U.S. as the 50 states and D.C.