Taxation of non-resident directors around the world

The pitfalls and risks of failing to get the tax and social security reporting correct across global locations

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By Andrew Kelly and Steph Carr, BDO in United Kingdom


Managing the income tax and social security withholding and reporting obligations for internationally mobile employees can be a challenge, and the complexity and risk profile increase significantly when it comes to compliance for non-resident directors (NRDs).

Against the backdrop of a sharpened universal focus by the tax authorities on the tax governance of global businesses, this is an area of heightened scrutiny.

With the details of board members public domain information in many territories, NRDs are very visible to the tax authorities. The reputational risk of not getting the reporting correct has never been greater.

Among the most common misconceptions are that: 

  • Board members cannot be subject to tax in a territory where they are non-resident
  • Directors are always treated for domestic tax and Double Tax Treaty (DTT) purposes the same way as employees
  • Board members can be subject to tax only if they receive a directorship fee payable by the entity on whose board they sit, and not if they are remunerated fully by a group company in a different jurisdiction.

When you consider that different tax jurisdictions have different rules on the tax and social security position, it is imperative to ensure that you have carefully reviewed the position.

Many DTTs include a separate clause of the agreement that considers the taxation of employment income to that which determines the taxation of directors’ fees, hence the ‘183 day rule’ (among other conditions) will very seldom apply.

Insight into the tax and social security treatment in different jurisdictions

We have worked with our BDO colleagues across a representative number of territories to highlight some of the key aspects of how board members can be subject to tax and social security and the risks if companies do not review their withholding and reporting obligations. This information is by nature generic and should not be relied on as exhaustive guidance, and with the inherent complexities in the rules, specific guidance should always be sought. Please click on the links below to see our comments regarding the rules in each jurisdiction. For each territory we have detailed based on an individual being the non-resident director and not a corporate body.

Next steps

Please contact Andrew Kelly or Steph Carr if you require assistance with reviewing the tax and social security payroll and reporting obligations of your company’s non-resident directors.

Overview: Non-resident directors are subject to Belgian tax. The company has a withholding tax obligation, and the non-resident director will need to file an annual Belgian income tax return.

Can non-resident directors be subject to Belgian taxation even if paid by an overseas group company rather than the Belgian entity on whose board they sit?

Even if remunerated by an overseas group company, the non-resident directors’ remuneration in relation to board meetings in Belgium can be subject to Belgian tax withholding.

What other factors need to be considered? 

Depending on the specifics of the case, the existence of a recharge arrangement between group entities (an overseas company that remunerates the individual and the Belgian company) can have an impact on whether directors’ fees are subject to Belgian tax. The terms of any relevant DTT would need to be reviewed. Under Belgian domestic rules, directors are deemed to be self-employed for social security purposes, but when the directors also have a separately remunerated role in another jurisdiction, relevant EU legislation and bilateral agreements should be examined to determine which social security scheme will be applicable to the directors’ fees. Belgium’s corporate law allows for a dual-layer corporate governance structure; therefore, in determining the tax position, it is important to know whether the individual is a member of the board of directors or a member of the executive committee. Non-resident directors may be eligible for the Belgian special tax regime.

Peter Wuyts
BDO in Belgium

Overview: Directors’ fees are considered employment income for Canadian tax purposes. Directors’ fees paid to non-residents of Canada for services rendered in Canada are subject to withholding tax.

 

Can NRDs be subject to Canadian taxation even if paid by an overseas group company rather than the Canadian entity on whose board they sit?

 

For Canadian tax purposes, a trigger for a non-resident of Canada to become liable to Canadian tax is when services are rendered physically in Canada; this trigger can apply regardless of whether the NRD is being remunerated by an overseas company. Therefore, attending board meetings in Canada would trigger the default tax withholding obligations. The employer/payor is responsible for apportioning the fees payroll reporting for services rendered in Canada.

What other factors need to be considered?

If a Canadian board member is remunerated exclusively by an overseas group company, including for the board duties performed in Canada, withholding tax would be due. However, if there is no recharge of the remuneration to the Canadian company, there may be scope to seek a withholding waiver from the Canadian tax authorities as relief under a DTT may be available.

Christopher Ng
BDO in Canada

Overview: Under French legislation, directors’ fees paid to non-executive directors (including those that are non-resident) for their activities as members of the board (attendance at board meetings and other preparatory or follow-up activities, going concern, oversight, etc.) are subject to a special tax treatment as they are assimilated to investment income for tax purposes. On this basis, directors’ fees are taxable as regular dividends at 12.8% rate. The company should apply withholding tax.

In the case of executive directors, income tax is deducted from the net remuneration (after deduction of social security contributions, if applicable) according to a three-tiered scale at 0%, 12%, and 20% applicable for non-resident directors and paid to the French tax authorities by the company on a quarterly basis.

Can NRDs be subject to French taxation even if paid by an overseas group company rather than the French entity on whose board they sit?

 

Under the French tax code, non-resident individuals are taxable in France on any French-source income; thus, a non-resident director remunerated by a foreign entity for his or her services, including board duties for the French entity, would be taxable in France on the portion of the remuneration relating to the activities performed in France. 

What other factors need to be considered? 

If the remuneration is paid by an overseas group entity and is not recharged to the French company on whose board the NRDs sit, there may be scope to claim relief from French tax under a DTT. The specific circumstances would need to be reviewed.

 
Claire Port
BDO in France
 

Overview: Directors' fees received from being a board member of an entity managed and controlled in Hong Kong is subject to Hong Kong salaries tax regardless of the director's  tax residency.

Can NRDs be subject to Hong Kong taxation even if paid by an overseas group company rather than the Hong Kong entity on whose board they sit?

Assuming the NRD is nominated by an overseas group company to act as a director of the Hong Kong entity but did not receive any directors’ fee from the Hong Kong entity, if the audited financial statements of the Hong Kong entity do not report a directors’ fee paid to the NRD, it could be argued that the remuneration received from the overseas group company for the directors’ services in Hong Kong is not in the nature of a directors’ fee but that it is employment income instead. Please note that the Hong Kong salaries tax treatment of directors’ fees and employment income are different. If the Hong Kong Inland Revenue Department is satisfied that the individual received employment income under a non-Hong Kong-source employment agreement, then the employment income may be taxed on a time apportionment basis (i.e., only income attributable to the services rendered in Hong Kong would be taxable) or other exemption claims may be applicable. 

However, if it is reported in the Hong Kong entity’s audited financial statements that a directors’ fee is paid to the NRD, assuming the Hong Kong entity is managed and controlled in Hong Kong, directors’ fees in return for his or her directorship in the Hong Kong entity (i.e., attending board meetings) are generally subject to salaries tax in Hong Kong regardless of whether received from an overseas group entity and whether the directorship services are rendered in Hong Kong.
 

What other factors need to be considered?

The existence of any recharge arrangement between an overseas group company that remunerates the non-resident director and the Hong Kong company (managed and controlled in Hong Kong), may have an impact on the Hong Kong salaries tax position. If the amount recharged is reported as directors’ fees in the audited financial statements of the Hong Kong entity managed and controlled in Hong Kong, the directors’ fees would generally be subject to Hong Kong salaries tax.

 

Hong Kong does not impose a social security contribution obligation, but it does have a Mandatory Provident Fund (MPF) scheme. Directors’ fees are not relevant income for MPF purposes, whereas salary is relevant income for MPF purpose.


Cecilia Ho
BDO in Hong Kong

Overview: Directors’ fees are considered taxable income subject to withholding tax, regardless of whether the income is received specifically as a directors’ fee or whether the director is remunerated for their board duties through their employment income. This applies equally to non-resident directors and in some circumstances social security contributions can be due as well.

Can NRDs be subject to Indian taxation even if paid by an overseas group company rather than the Indian entity on whose board they sit?
 

Yes, services as a director are deemed to have been rendered in India when the director sits on the board of an Indian company.

What other factors need to be considered?

Depending on the specifics of the case, the existence of a recharge agreement between group entities (an overseas company from which they are solely remunerated and the Indian company on whose board they sit) can have an impact on whether directors’ fees are subject to Indian tax. Irrespective of remote participation from another jurisdiction, as the non-resident director is receiving fees in relation to services rendered to an Indian entity, the fees are subject to tax in India.

Deepashree Shetty
BDO in India


 

Overview: Directors’ fees are subject to tax and social security as employment income and payroll withholding taxes must be applied regardless of the individual’s tax residency.

Can NRDs be subject to Irish taxation even if paid by an overseas group company rather than the Irish entity on whose board they sit?

 

There should be a potential exemption from Irish tax in this circumstance if there is a DTT in place. Whilst the Irish tax authorities could argue that a portion of the remuneration should be treated as arising from the Irish directorship, and this possibility cannot be ruled out entirely, we are not aware of any actual instances of this approach being taken. 

What other factors need to be considered? 

Even if there may be scope to exempt non-resident directors’ earnings from Irish tax by virtue of the remuneration being solely paid from an overseas group company, and there is a DTT in place between the individual’s jurisdiction of residency and Ireland, the employer can be exposed to failure to account for withholding tax if a waiver is not sought from the Irish tax authorities.

Mark Hynes
BDO in Ireland

Overview: Directors’ fees to non-residents are subject to Singapore withholding tax at 24% (the tax rate effective from year of assessment 2024).  Payment is to be settled via withholding tax filing. 

Can NRDs be subject to Singapore taxation even if paid by an overseas group company rather than the Singapore entity on whose board they sit?

 

If the directors’ fees are paid by a foreign group company with no presence in Singapore, and there is no recharge to a Singaporean company, there is potentially no liability to Singaporean tax. If, however, there is a recharge of costs to the Singaporean entity, then there is a liability to Singaporean tax.

 

What other factors need to be considered? 

Social security -- the Central Provident Fund (CPF) -- contributions are not applicable to payments of directors’ fees to non-residents, because only Singapore citizens and Singapore permanent residents are required to contribute CPF. 

Suba Rathakrishnan
BDO in Singapore

Overview: Swiss companies hiring non-Swiss residents as members of the board of directors must withhold tax on the directors’ fees. Because board directors are considered employees, Swiss Social Security is due unless there is an exemption under a bilateral social security agreement or under  EU rules, to which Switzerland is a signatory. In Switzerland, unannounced tax and social security audits of companies are typically conducted every 3-5 years, and the tax authorities keep close scrutiny of how non-resident directors are treated via payroll.

 

Can NRDs be subject to Swiss taxation even if paid by an overseas group company rather than the Swiss entity on whose board they sit?

 

Yes, if the director performs services as a member of the board of directors for a company domiciled in Switzerland in his or her personal capacity, it is generally irrelevant whether the actual remuneration for those services comes from an entity in another jurisdiction. However, in assessing the tax position, it is important to determine if the director is also providing operational services for the Swiss company, as opposed to performing only advisory and oversight functions as a board member.

 

What other factors need to be considered?

The existence of a recharge arrangement between group companies (an overseas company from which the non-resident directors are remunerated and the Swiss company on whose board they sit) can have an impact on the taxation of the remuneration, but only in relation to the part of the remuneration for operational activities. Remuneration for the supervisory and advisory duties of a board member will be subject to Swiss taxation regardless of whether there is a recharge arrangement.

Dejan Milosevic
BDO in Switzerland
 

Overview: Statutory directors of UK companies are considered ‘office holders’ and as such their remuneration is subject to PAYE. This applies equally to the UK duties of NRDs. When some duties are performed outside the UK there is scope to have PAYE operated on a reduced percentage of the remuneration. All directors of UK companies, including non-resident directors, must file a UK tax return.

Can NRDs be subject to UK taxation even if paid by an overseas group company rather than the UK entity on whose board they sit?
 
Yes, and this is an area that is actively pursued in HMRC Employer Compliance reviews.

What other factors need to be considered?

HMRC’s view is that the UK board duties of NRDs should be subject to UK tax regardless of whether the remuneration paid by an overseas group entity is recharged to the UK company. The tax position on the costs of travel to the UK and accommodations reimbursed by the business need to be reviewed and, depending on the circumstances, tax relief may be available.

The default position is that employer and employee National Insurance Contributtion (NIC) is due unless exemption can be claimed under a narrowly drawn domestic concession or a valid A1 or Certificate of Coverage being available to demonstrate that social security on the earnings is being paid in another jurisdiction.

Andrew Kelly
BDO in United Kingdom

Overview: The IRS considers directors’ fees to be self-employment income and not employee wages. The U.S.-source portion of directors’ fees is subject to a federal income tax withholding rate of 30%. U.S. NRD ‘aliens’ (to differentiate from U.S. citizens/Green Card holders) are generally not subject to U.S. social security taxes, unless imposed under the terms of a totalization agreement.

Because directors’ fees are typically considered effectively connected income (to the US), ‘alien’ NRDs will be taxable on the U.S.-source portion of this income at graduated tax rates. A refund for over withholding, when applicable, must be requested by filing the individual’s U.S. nonresident alien tax return.
 

Can NRDs be subject to U.S. taxation even if paid by an overseas group company rather than the U.S. entity on whose board they sit? 
 

Yes, only for federal income tax purposes.

What other factors need to be considered? 

Among these are the terms of the relevant DTT and where the NRD is remunerated by a group entity in another territory the recharge arrangements between the non-US and US entities. Non-resident alien director’s will generally not be subject to U.S. social security taxes.

Amanda Harrell
BDO in United States

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