Mobility Matters September 2021 Issue

Board meets world: Mobility considerations for a multinational board of directors

September 2021 | by Thomas Murray, Catherine Maldari, Rachel O’Hara, KPMG in Stamford, and John Seery, KPMG in Washington, D.C. 

The makeup of a company’s board of directors (BOD) is increasingly a reflection of the company’s global presence: Individuals of different nationalities meeting in different countries (or virtually) for BOD meetings throughout the year. While mobility programs are often familiar with the compliance challenges of managing a globally mobile workforce, the complexities of a globally mobile BOD―the highest level of a company’s operating team―may at times be overlooked.

This article examines considerations for companies assessing their U.S. federal income and Social Security tax obligations with respect to their multinational BOD members attending meetings in the United States. Specifically, attention is given to the U.S. taxation of directors who are nonresidents of the United States.


Considerations for BOD meetings within the United States

A number of factors need to be considered in determining a company’s U.S. tax obligations with respect to its BOD meetings in the United States, including the employment and tax residency statuses of the various members of the BOD, the source of compensation paid to the members of the BOD for their service on the BOD, and whether any relief from U.S. tax and Social Security is available under the terms of an income tax treaty and social security totalization agreement.

Director or employee?

A company’s BOD is often made up of “executive directors” and “non-executive directors.” Executive directors are corporate officers like the company’s Chief Executive Officer, Chief Financial Officer, and other members of the company’s C-Level or executive team who serve on the BOD because of their executive position within the company. Non-executive directors generally do not have a pre-existing employment relationship with a company and are often hired to serve on the BOD for their specific industry knowledge, subject matter expertise, or experience.

Notwithstanding that both executive and nonexecutive directors often perform the same BOD duties, executive directors serving on their company’s BOD due to their executive positions are often treated as employees of the company subject to limited exceptions1, whereas nonexecutive directors are not2. 

This distinction is significant as a company may have U.S. federal income and social security tax withholding and reporting obligations with respect to employment compensation paid to an executive director that it does not have with respect to compensation paid to a non-executive director.3 Additionally, this distinction is relevant in considering whether a board member’s compensation qualifies for relief under the terms of an income tax treaty or a social security totalization agreement. From a U.S. income tax perspective, an executive director’s compensation is generally covered under the “Income from Employment” or “Dependent Personal Services” article of a U.S. income tax treaty, whereas a non-executive director’s compensation is generally covered under the “Directors’ Fees” article, or in treaties without a “Directors’ Fees” article under the “Independent Personal Services,” or “Business Profits” article.4

Tax residency status

Another important consideration is the tax residency status of the various members of the BOD. As a general matter, many countries tax their residents on their worldwide income and any nonresidents on income attributable to services performed within the country. A member of the BOD who is not a tax resident of the country in which he or she is attending a BOD meeting may therefore be subject to tax in both the member’s country of residence and the country of the meeting. Whether there is any potential treaty relief to alleviate this double tax will depend on the tax residency status of the individual.

In addition to this general concern, from a U.S. tax perspective, a company’s reporting and withholding obligations with respect to compensation paid to a director is largely driven by whether that director is a citizen or tax resident of the United States.5 It is therefore a best practice to verify whether the individual director is a U.S. citizen or green card holder.6 If not, then residency status is generally based on whether an individual director satisfies the “substantial presence test,” which measures an individual director’s days of U.S. presence.7

If a director is not a U.S. citizen or green card holder, and does not satisfy the “substantial presence test,” then the director is a nonresident for U.S. federal income tax purposes.8 Generally, a nonresident director is only subject to U.S. federal income tax on income from sources within the United States (“U.S.-source income”), regardless of whether that director is an executive or non-executive director (subject to treaty considerations discussed later and certain exemptions outside the scope of this article).9 However, the source of compensation for board service may in part depend on whether the director is an executive director or non-executive director.


U.S. Federal Income Taxation

Income sourcing considerations


Executive directors 

Executive directors, as employees of the company, are generally not separately compensated for their BOD service, as their service on the BOD is considered a part of their responsibilities as an officer of the company. As such, when a nonresident executive director is present in the United States attending BOD meetings, it is generally necessary to allocate all of the director’s compensation for services between U.S. and non-U.S. sources on a time basis based on work days for the period the compensation is earned10 (although in certain circumstances an alternative basis to the time basis may be used).11 This can be particularly challenging for C-Level employees, who frequently receive various types of multi-year incentive or equity compensation.12 It is therefore important to have insight into an executive director’s total compensation package and travel history in projecting the U.S. tax cost of the director’s BOD service.


Francis, a U.S. nonresident, is the Chief Financial Officer (CFO) of Company A. As part of Francis’ responsibilities as CFO, Francis serves on Company A’s BOD. Francis receives annual compensation of USD 500,000 as CFO of Company A. Francis works 240 days a year, primarily outside the United States. However, due to BOD meetings and other CFO responsibilities, Francis worked 60 days in the United States. Allocating his income on a time basis based on workdays would result in U.S.-source income of USD 125,000, computed by taking his 60 U.S. workdays divided by 240 total workdays and applying the ratio to his compensation of USD 500,00.

Non-executive directors 

Non-executive directors are typically provided annual director fees that are connected to their specific role on the BOD. As non-executive directors are not employees, their compensation does not necessarily need to be sourced over a time basis.13 Sourcing non-executive director compensation is a facts and circumstances determination, and consideration should be given to the sourcing rules when drafting a non-executive director’s compensation agreement so as to minimize the director’s U.S. tax liability.14


Kelsey is a U.S. nonresident non-executive director. She receives annual compensation of 100,000USD for her position on the BOD of Company B. Kelsey’s compensation is tied to the number of BOD meetings she attends during the year. Kelsey attends four BOD meetings for Company B over the course of the year, three of which are held in the United States and one of which Kelsey joins remotely from her home country of Italy. Allocating her income on a per meeting basis would result in U.S.-source income of USD 75,000, computed by taking her 3 U.S. meetings divided by 4 total BOD meetings and applying the ratio to the total annual BOD compensation.

In this case, Kelsey’s compensation is linked to the number of BOD meetings she attends during the year. As mentioned, however, the sourcing rules offer flexibility in allocating compensation between U.S. and non-U.S. sources. After taking into account Kelsey’s anticipated responsibilities as a member of the BOD, travel schedule, the number of scheduled BOD meetings per year and other relevant factors, structuring Kelsey’s compensation package and sourcing her income other than by reference to her attendance at board meetings may serve to minimize Kelsey’s exposure to U.S. income tax.


KPMG Insight: Due to health concerns and travel and work restrictions caused by the ongoing coronavirus pandemic, more companies are choosing to hold virtual BOD meetings through web-based video conferencing applications. An advantage to holding virtual BOD meetings over in-person meetings is that BOD members are generally only subject to tax on income for their BOD service in their home country.


U.S. income tax withholding and reporting obligations

A company’s withholding obligations with respect to U.S.-source compensation paid to a nonresident director depends on whether that director is an executive director (i.e., an employee) or non-executive director (i.e., an independent contractor).

Executive directors 

A company is generally required to deduct and withhold U.S. federal income tax on U.S.-source compensation paid to a nonresident executive director at normal graduated rates.15 A company is generally required to report the total amount of U.S.-source compensation paid and U.S. federal income tax withheld to the Internal Revenue Service (IRS) and to the employee on Form W-2, Wage and Tax Statement.16

Nonexecutive directors 

A company making a payment to a nonresident non-executive director generally has an obligation under U.S. law to withhold U.S. federal income tax on the gross payment of U.S.-source income at a rate of 30 percent, absent treaty relief.17 As a company that fails to properly comply with this obligation may be subject to significant penalties, many companies choose to withhold U.S. tax on a nonresident nonexecutive director’s entire BOD compensation, both U.S. and foreign source. An advantage to this approach is that it ensures both the company and director avoid any reputational or audit risks for noncompliance. However, overwithholding may present a cashflow issue for the individual director. While a director is generally able to recoup any excess U.S. federal income tax withholdings, this cannot be done without the filing of a U.S. tax return after the close of the calendar year.18

A company looking to both comply with its withholding obligations and help make sure its directors are not negatively impacted by excess withholding will want to consider obtaining detailed records of a director’s activities (including travel information, meeting attendance logs, and time spent preparing for or following up on BOD meetings) to support its compensation sourcing determinations in the case of an audit.

With respect to reporting, a company making a payment of U.S.-source income to a nonresident non-executive director must report that income and amounts withheld to the IRS on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, and to the nonexecutive director on a Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding.19

Treaty considerations 

The United States has entered into a number of income tax treaties with other countries, the terms of which may provide nonresident directors with an exemption from U.S. tax on compensation for services performed in the United States, and may relieve a company from onerous U.S. income tax withholding and reporting obligations. Generally, being a tax resident of a country with which the United States has an income tax treaty is a precondition of claiming any treaty relief or benefit, so having insight into the residency statuses of the BOD members is necessary to assess potential treaty relief.

Additionally, as mentioned above, whether a nonresident director is an executive director or a nonexecutive director is relevant in considering whether the director qualifies for relief under the terms of an income tax treaty. This discussion focuses on potential treaty relief for nonexecutive director compensation, which is generally covered under the Directors’ Fees article.20

Under the 2006 United States Model Income Tax Convention (the 2006 Model Treaty),21 which serves as a framework for many U.S. income tax treaties, directors’ fees and other compensation derived by a resident of a Contracting State for services rendered in the United States in his or her capacity as a member of the BOD of a company that is a resident of the United States are not exempt from U.S. federal income tax. 22

However, the Directors’ Fees article in 2006 Model Treaty does not apply in situations where a nonresident nonexecutive director is present in the United States to attend a BOD meeting for a non-U.S. company. In such instances, it would be necessary to look to the Business Profits article (which also generally applies in situations where a U.S. income tax treaty does not have a Directors’ Fees article). The Business Profits article generally limits the U.S. taxing right to situations where the nonresident nonexecutive director has a permanent establishment in the United States.23 A permanent establishment may include any fixed place of business through which the business of the director is wholly or partly carried on (such as a place of management, branch, office, etc.). Given the relatively broad definition, companies may want to consider hosting BOD meetings with nonresident nonexecutive directors in various locations throughout the year as opposed to a single U.S. office.24

While the 2006 Model Treaty may serve as a helpful resource in generally understanding U.S. income tax treaties, every U.S. income tax treaty is unique and it is therefore important to consult the actual language of a treaty in assessing whether relief from U.S. tax may be available.

One final point with respect to income tax treaties: it is important to consider the domestic laws of the two treaty partners in assessing whether relief from double taxation is available. Contracting countries generally interpret treaty provisions consistent with their respective domestic tax laws, which may lead to conflicts as to which country has the right to tax an item of income under the treaty, or the appropriate income sourcing method, resulting in potential double taxation that cannot be alleviated without seeking a competent authority determination.

U.S. Social Security taxation

As mentioned, a company may have U.S. Social Security tax obligations with respect to a nonresident executive director performing services in the United States. The Federal Insurance Contributions Act (FICA) tax is imposed on both the employer and the employee with respect to wages paid to the employee for covered employment.25 Generally, covered employment includes services performed by any employee within the United States. Thus, nonresident executive directors and their employers are generally subject to FICA tax on compensation for services performed in the United States. Additionally, as there is no “de minimis” rule for when FICA tax applies, many nonresident employees may also be subject to social security tax in their home countries.

The United States has entered into a number of social security totalization agreements with other countries to eliminate double social security taxation and provide integrated benefits. Like income tax treaties, every social security totalization agreement is unique. However, generally, an employee is subject to social security tax in the country where he or she is performing services. However, an agreement may provide that an will employee remain covered only by his or her home country’s social security system, for a limited period of time (generally, five years). This is known as the “detached worker” exception. If an employee qualifies for this exception, then an employer should request a special statement known as a “Certificate of Coverage” from the social security authorities in the employee’s home country to document this exception from U.S. Social Security tax obligations.

Social security tax is imposed on self-employed individuals (i.e., independent contractors) with net earnings of USD 400  or more under the Self-Employment Contribution Act (SECA).26 SECA tax is not generally imposed on individuals who are considered nonresidents for tax purposes.27 Thus, a nonresident executive director is generally not subject to the SECA tax unless a U.S. social security totalization agreement provides that the director is covered under the U.S. social security system.



Members of a BOD may be citizens of different countries than the country that is the home location of the company on whose board they serve. Moreover, they may be attending board meetings in various locations outside their home countries and this can create tricky income and social security tax exposures and compliance situations. 

Companies should not overlook the cross-border tax consequences of having a global BOD, as compliance failures carry significant monetary and reputational risks for both the company and its directors. Having insight into the makeup of the BOD, its compensation structure, and its travel and work details will allow a company to proactively assess its obligations in various jurisdictions and mitigate exposure to onerous withholding and reporting requirements for its BOD.

1 Treas. Reg. § 31.3401(c)-1(f). Unless otherwise indicated, all references to “section” or “sections” herein are to the Internal Revenue Code of 1986 (the “Code”), as most recently amended, or to the U.S. Treasury Department Regulations (Treasury Regulations), as most recently adopted or amended. See Rev. Rul. 57-246; Jacobs v. Comm'r, 66 T.C.M. (CCH) 1470 (T.C. 1993).
2 Treas. Reg. § 31.3401(c)-1(f).
3 I.R.C. §§ 3102, 3402; Treas. Reg. §§ 31.3102-1, 31.3402(a)-1. An employer might also have Federal Unemployment Tax Act (FUTA) tax obligations with respect to an employee working in the United States; however FUTA tax is levied on the employer only and is not withheld from an employee’s wages. I.R.C. §§ 3301, 3306.
4 See e.g. United States Model Income Tax Convention of November 15, 2006. In some treaties, both executive directors and non-executive directors are covered by the same article. See e.g., U.S.-Australia Income Tax Treaty, Article 15, Income from Employment (as amended through 2011) (“[S]alaries, wages and other similar remuneration derived by an individual who is a resident of one of the Contracting States in respect of an employment or in respect of services performed as a director of a company shall be taxable only in that State unless the employment is exercised or the services performed in the other Contracting State.”).
5 See generally I.R.C. §§ 3402, 3101, 3121(b).
6 I.R.C. § 7701(a)(30)(A), (b)(1)(A)(i).
7 I.R.C. § 7701(b)(1)(A)(ii), (3)(A). In certain circumstances, a foreign national may be able to elect to be treated as U.S. resident. See I.R.C. § 7701(b)(1)(A)(iii), (4) and I.R.C. § 6013(g), (h).
8 I.R.C. § 7701(b)(1)(B).
9 I.R.C. § 871.
10 I.R.C. § 861(a)(3); Treas. Reg. § 1.861-4(b)(2)(ii)(A), (E).
11 An employee is allowed to determine the source of his or her compensation under an alternative basis, but this requires the employee establish to the satisfaction of the IRS that under the facts and circumstances the alternative basis more properly determines the source of compensation than the time basis. Treas. Reg. § 1.861-4(b)(2)(ii)(C)(1)(i).
12 Treas. Reg. § 1.861-4(b)(2)(ii)(E), (F).
13 Treas. Reg. § 1.861-4(b)(2)(i).
14 Treas. Reg. § 1.861-4(b)(2)(i).
15 I.R.C. § 3402(a)(1). Compensation paid to a nonresident alien employee for the performance of services in the United States is exempt from the 30% withholding required under I.R.C. § 1441 (discussed in the non-executive director section below) as it is subject to wage withholding under I.R.C. § 3402. See I.R.C. §§ 1441, 871(b)(1), 861(a)(3), 864(b), (c)(3); Treas. Reg. § 1.1441-4(b)(1)(i), (ii).
16 I.R.C. §§ 6041, 6051.
17 I.R.C. § 1441.
18 While not a pre-condition to obtaining a refund, it is generally a best practice for a taxpayer to retain supporting documentation to substantiate a sourcing allocation in the event of an IRS audit.
19 Treas. Reg. § 1.1461-1(b), (c).
20 See e.g., United States Model Income Tax Convention (2006).
21 Note, this article refers to the 2006 Model Treaty as opposed to the more recent 2016 United States Model Income Tax Convention (“the 2016 Model Treaty”), as the United States has yet to ratify a treaty that uses the 2016 Model Treaty as a framework.
22 United States Model Income Tax Convention, Article 15, Directors’ Fees (2006). Similar language is found in Article 15, Directors’ Fees, of the United States Model Income Tax Convention of September 20, 1996.
23 United States Model Income Tax Convention, Article 7, Business Profits (2006).
24 United States Model Income Tax Convention, Article 5, Permanent Establishment (2006).
25 I.R.C. § 3101, 3121(a) and (b).
26 I.R.C. § 1401, 1402.
27 I.R.C. § 1402(b).