Non-U.S. Directors and Possible Tax Implications for Businesses

When non-U.S. resident directors attend board meetings in the U.S., they can find that their limited attendance may have unanticipated tax ramifications for the business and themselves. The Internal Revenue Service considers any directors’ fees paid to non-U.S. citizens who routinely serve on boards for U.S. based businesses as subject to a 30% withholding, and may require tax reporting on annual federal returns. The Internal Revenue Code (IRC) provides limited alternatives for non-U.S. citizens to have U.S.-sourced compensation exempt from U.S. income tax. For non-U.S. directors, one clause—the de minimis exception of Sec. 861(a)(3)—could be applicable. These directors will frequently have to rely on an income tax treaties between the U.S. and their home country for possible relief, however, given the history and restrictions of this exception.

The de minimis exception of Sec. 861(a)(3) of the U.S. Internal Revenue Code is designed to address specific situations where non-U.S. citizens’ compensation could be treated as foreign-sourced income, which would exempt that income from U.S. federal income tax withholding and possibly reduce U.S. tax liability. Restrictions apply as the following conditions must be met to qualify for such this exception: the non-U.S. resident cannot be in the U.S. for more than 90-days during the tax year, the total compensation for services cannot exceed $3,000 in aggregate and the compensation must be paid by a foreign employer or office maintained in a foreign country or U.S. possession.

The biggest takeaway regarding the de minimis exception of Sec. 861(a)(3) is to note that any compensation that exceeds $3,000, the entire amount could be considered U.S. income and subject to tax withholding. This is the main reason why most non-U.S. citizens rely on income tax treaties with their home country to find tax relief. Additionally, if a U.S. state does not adhere to the federal treatment of a specific foreign income tax treaty, the applicability of the treaty may be limited based on which U.S. state the non-U.S. resident director provides services in.

For a modern non-U.S. resident board member whose meeting fees and retainers frequently surpass $50,000 in a tax year, the de minimis exception is of limited utility due to the natural rate of inflation from the beginning of the twentieth century to the new century. Contact a reliable financial advisor, CPA and/or local tax attorney for more guidance on this exception.

If you have any questions regarding your individual or businesses’ state and/or federal tax return(s)/tax liabilities or received a notice from the IRS, FTB, EDD, CDTFA or any other regulatory agency, please call or email Wilson Tax Law Group, APLC, to setup a consultation with our firm.

Wilson Tax Law Group, APLC is a boutique Orange County tax controversy law firm that specializes in representation of individuals and businesses before federal and state tax authorities with audits, appeals, FBAR, offshore compliance, litigation and criminal defense.  Firm founder, Joseph P. Wilson, is a former Federal tax prosecutor and trial attorney for the IRS and California Franchise Tax Board.  Wilson Tax Law Group, APLC, is comprised of former IRS litigators & Special Agents, and Assistant US Attorneys from the US Attorney’s Office, Central District of California, Tax Division, which at the time handled both civil tax lawsuits and criminal tax prosecutions on behalf of the United States of America.

For further information, or to arrange a consultation please contact: Wilson Tax Law Group, APLC

Tel: (949) 397-2292 (Newport Beach Office) 

Tel: (714) 463-4430 (Yorba Linda Office)

Disclaimer: This blog post is for informational purposes only and does not constitute legal, tax or financial advice. Please consult with a qualified attorney, accountant or financial advisor for specific guidance related to your circumstances.