There have always been some uncertainties around the taxation of directors’ fees as opposed to income from employment. This uncertainty was also fuelled by the fact that there were many cases of double non-taxation on income received by directors. Whilst the wording of article 16 of the OECD Model Tax Convention is clear, there are a number of important clarification points in the Commentary which are worth noting. Firstly, in accordance with Article 16, directors’ fees may be taxed in the Contracting State where the company, of which a person is a director, is resident. The logic behind this is clear – a director carries out his/ her functions in the state where the company is resident, typically being the place of effective management. This falls squarely in line with Article 4 of the same Convention, which states that, in the case of a dual residence of companies, residence is determined by mutual agreement having regard to the company’s place of effective management, the place where it is incorporated and any other relevant factors. The Commentary to Article 4 states that the competent authorities would be expected to take account of various factors such as where the meetings of the persons’ board of directors or equivalent body are held, where the CEO and other senior executives carry out their activities and where the senior day-to-day management of the company is carried on, amongst other factors. The Commentary to article 16 provides a number of important insights: Firstly, ‘fees and other similar payments’, which is the wording used in the article, includes benefits in kind received by the person in that person’s capacity as a member of the board. This clarification is important for two reasons. It clarifies that any payments in kind such as stock options or life insurance, paid to such a person, for that person’s role as a director fall under Article 16. It also clarifies that, only fees or similar payment which are paid to a person in that person’s capacity as a board member fall within the provisions of article 16. The commentary goes on to state that persons who are members of the board, could also have other functions within that same company, including that of an employee. Any payments to the person on account of such other functions, and not functions relating to their capacity as a board member, does not fall within the remit of article 16. The commentary provides further important clarification on the issue of stock options provided to persons in their capacity of board members. Article 16 will apply to any benefit derived from the option itself, before any possible gain as a result of the sale or alienation of the stock. Any such gains would then be covered by Article 13 of the OECD Model Tax Convention since the person is making the gain in his/ her capacity as an investor/shareholder. As mentioned above, it is important to be able to differentiate directors’ fees from employment income when derived by a person who sits on the board – this is not always easy to do, but it is important in view of the fact that the separate income items fall within different articles of the specific treaties. The writer is a co-founding partner of Seed, an international research-driven advisory firm with offices in Europe and the Middle East. www.seedconsultancy.com | nicky@seedconsultancy.com
