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Anecdotal evidence suggests that foreign companies - especially foreign subsidiaries of U.S. companies - are increasingly holding their board of directors' meetings within the United States. This commentary summarizes the principal U.S. income tax reporting and compliance issues that apply with respect to the three categories of individuals to whom a foreign company pays directors' fees - U.S. citizens, resident aliens, and nonresident aliens. (Because the rules for U.S. citizens and resident aliens are essentially identical, those two categories will be referred to as "U.S. persons.") It is assumed that no income tax treaty applies (although a future commentary will discuss the very interesting tax treaty implications in this area).
The payor of the directors' fees (i.e., the foreign corporation) will need to make a determination concerning the U.S. income tax status of each individual director - in other words, whether the individual is a U.S. person or a nonresident alien. Assuming proper documentation is requested and received from all of the U.S. directors, the payor will only be required to report the directors' fees for those individuals on IRS Form 1099. With respect to fees paid to nonresident alien directors, however, 30% withholding will be required under §1441 on part or all of the fees.
In determining which directors are U.S. persons and which are nonresident aliens, the §1441 regulations contain several presumptions based on documentation provided by the payee to the payor, and on any actual knowledge that the payor has concerning the payee. ' Because the payees in this instance will be individuals who are intimately involved with the company's affairs rather than occasional independent contractors, the company will usually have actual knowledge of each payee's status. In order to minimize potential problems vis-á-vis the IRS, however, the company should request each director to complete either Form W-9 (completed by U.S. citizens and resident aliens) or Form W-8BEN (completed by nonresident aliens). Assuming that the payor has no reason to believe that any of the information provided to it is incorrect, in most cases it would be entitled to rely on this information in doing the necessary compliance with respect to each director.
With respect to the U.S. directors, the Form W-9 that the payor receives from each of them will...