Non-resident directors: Key considerations for global mobility

Many organizations recognize the compliance risks associated with cross-border employee movements. They often seek advice on tax, immigration, and social security compliance, and develop policies to manage risks and prepare cost estimates to budget for these moves. But how many consider if the mover is a director?

It’s quite common for companies to have directors based overseas. These individuals usually reside in their home country and attend select meetings at a foreign company. They are typically not employees of the overseas company. Due to their limited and high-level trips, they might not be on anyone’s radar. Even if they are, they might be treated like employees – so short trips of 15 to 20 days per year should be fine, right?  The answer is, “it depends,” as the rules for directors vary significantly across countries.

Understanding the rules for your company’s non-resident directors

Understanding how directors are classified in different countries is crucial for compliance. In UK for example, a statutory director is considered an “office holder” and is automatically deemed an employee, even if services are provided through a service company. In the US, directors are considered self-employed. In France, there is a distinction between non-executive and executive directors, with a special tax regime for the former. In some countries, like Canada, even if a director is paid by a non-Canadian company, there may be a tax withholding requirement in Canada. However, a treaty may exempt this if there is no recharge to the Canadian company. In Belgium, directors are self-employed for social security purposes, but if they have another paid role, social security agreements might still need to be considered. In Hong Kong, director’s fees are treated differently from salary when determining contributions to the Mandatory Provident Fund (MPF) scheme.

In short – it is complicated, and as is often the case, professional advice should be sought. However, asking a few questions should at least help you understand what advice you need.

Key compliance considerations for Directors

Compliance for directors goes beyond simple payroll management. Directors may trigger tax, social security, and even corporate presence issues in the countries they operate in. Here are 10 important questions to consider:

1. What type of Director are they?

Executive directors typically manage day-to-day business operations and are often employees of the company. Non-executive directors, however, offer independent advice and are not employees. Understanding whether the director is paid for specific board duties or if it’s part of their general role is crucial, as it can significantly impact tax liabilities.

2. How and where is the Director paid?

If directors are paid specifically for their board duties in a foreign country, this will almost always create tax and social security liabilities there. Even travel and accommodation expenses can incur local tax obligations, depending on the country’s rules.

3. Where is the Director a tax resident?

Understanding where the director is tax resident, where they pay social security, and how often they travel abroad is essential. This will influence the level of tax and social security compliance needed in both the home and host locations.

4. Could the Director create corporate tax risks?

Directors’ activities can sometimes establish a corporate presence, or permanent establishment (PE), in the director’s home country for the foreign company. This could trigger additional corporate tax obligations, so it’s essential to assess their activities carefully.

5. What is their employment status?

Directors may be considered employees in one country but self-employed in another. This mismatch can complicate tax and social security compliance, so it’s important to determine their status in each jurisdiction they operate in.

6. Is there a tax treaty involved?

Many tax treaties include specific provisions for directors, giving the host country the right to tax fees earned there. If the director isn’t acting in an official board capacity, they could be considered an employee for tax purposes, which may limit the application of treaty relief.

7. Are there withholding or reporting obligations?

If the director incurs a tax liability in a foreign country, your company may be required to withhold taxes, even if the director is not considered an employee. Failure to meet these obligations can result in penalties and reputational damage.

8. Have you reviewed social security agreements?

In some cases, directors are treated as employees in one country and self-employed in another, complicating social security compliance. Reviewing social security agreements (or totalization agreements) between countries is crucial to determine which country has priority and avoid double contributions.

9. Are there special tax rules for short-term visits?

Some countries have special tax rules for directors on short visits solely for board meetings. It's important to check if these rules apply to reduce or eliminate tax liabilities for limited-duration trips.

10. What are the immigration requirements?

Directors may still require visas for certain activities, although in some cases, such as in the UK, they might be able to enter as visitors as long as their activities comply with the rules for that visa category.

Take action to ensure Director compliance

Directors can easily fall under the radar when it comes to tax and compliance, but their roles can trigger complex obligations. By asking the right questions and seeking professional advice, you can mitigate these risks and ensure your company remains compliant across multiple jurisdictions. Remember, directors’ details are often publicly available, making them easy targets for tax authorities if something goes wrong.