Six Ways US Tax Treaties Handle Director Fees

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July 24, 2026·Updated August 2, 2026·14 min read·Tax Treaty Analysis

If your US company pays a non-US person to sit on its board, the withholding analysis runs in a fixed order, and the first step is not the treaty. It is a sourcing rule in the Internal Revenue Code.

Step one: sourcing (§861(a)(3)). Compensation for personal services (and a director's board service is personal services) is US-source only to the extent the services are performed in the United States. Fees for board services performed entirely outside the US are foreign-source income of a foreign person: no US withholding applies, and the payment is not reportable on Form 1042-S. This is statute, not treaty. It holds for every country, including countries with no treaty at all. When services are split, only the US-performed share is US-source. The rest falls out of the system before any treaty question is asked.

Step two. The treaty, for the US-source share. The statutory default on the US-source share is 30% withholding (IRC §1441). A tax treaty can reduce that, sometimes to 0%, but only if the treaty's Directors' Fees article (Article 16 in the OECD model) actually grants relief, and only in the way that article is worded. No two treaties word it the same way. Read across the US treaty network and director fees fall into six distinct structures, plus two rare variants.

For reporting: US-source director fees go on Form 1042-S. Director's fees have no dedicated 1042-S income code. Report them as compensation for independent personal services, income code 17, not income code 24, which is for qualified-investment-entity capital-gain distributions. Confirm the code against the current Form 1042-S instructions. The foreign-source share of a split fee, and a fee for services performed entirely outside the US, is not reported on Form 1042-S at all.

A companion article, "Conditional Director Fees: The France Example," drills into Structure 2, including what actually happens when a director with a conditional-treaty exemption performs some services in the US.

The six structures at a glance

The sourcing floor is universal: no US services → 0%, nothing to report, regardless of structure. The table shows what each structure does to the US-source share once some services are performed in the US. Each structure links to its full section below.

Two rare variants (allocation by meeting location (Ireland, Chile) and a per-day de-minimis cliff (Jamaica)) are covered in their own section.

How to tell which structure applies to you

1. Where were the services performed? Entirely outside the US → 0%, nothing to withhold or report, stop here. This is the sourcing statute, and it applies for every country. Partly in the US → compute the US-source share and continue.
2. Is it Australia, Cyprus, or Thailand? Each has its own mechanism (Structure 3): Australia and Thailand allocate, 30% × the US-performed fraction. Cyprus is 0% with no US meetings and a review of the Art. 20 excess computation when there are US meetings.
3. Does the treaty have a Directors' Fees article? No → Structure 5, statutory 30% on the US-source share.
4. Is the grant unconditional ("may be taxed," no service condition)? Structure 1, 30% on the US-source share, no relief. Conditioned on "services rendered in" the US (or the Mexico/Portugal/Spain inverted form)? → Structure 2. The grant itself allocates: 30% × the US-performed fraction. Express "to the extent" wording in the article → Structure 4 (pro-rata: Netherlands, Sweden, Ukraine, with Italy reaching the same result via Protocol ¶14).
5. Check the variants: meeting-location wording (Ireland, Chile), a per-day dollar amount (Jamaica), or the Bangladesh shareholder tier (Structure 6).
6. Unusual wording or messy facts? Withhold conservatively at 30% on the US-source share and get advice. Over-withholding can be corrected. A failure to withhold leaves you, the payor, on the hook for the tax plus penalties.

Get a valid Form W-8BEN on file before applying any treaty-based rate, and document the service-location allocation (calendars, meeting minutes, a signed statement). The sourcing split is only as defensible as its records.

The six sections below are the reference depth for each structure.

Structure 1: Unconditional

30% on the US-source share. The treaty gives no relief.

The signal: the treaty says directors' fees "derived by a resident of a Contracting State… as a member of the board of a company resident in the other Contracting State may be taxed in that other State", with no condition tying the tax to where the services are performed. Thirteen treaties use this unconditional wording. Denmark is the textbook case, and Japan, China, India, Switzerland, and Bulgaria sit in the same group.

What "unconditional" does not mean is that a fully remote director owes US tax. The sourcing rule comes first. A Copenhagen director who attends every board meeting by video from her home office has performed no services in the US, so her fee is foreign-source: 0% withholding, and not reportable on Form 1042-S. The treaty's unconditional grant never comes into play, because there is no US-source income for the US to tax.

Where the unconditional structure bites is the US-performed share: there is no treaty argument to reduce it.

Worked example: Acme Studios pays a Danish board member a $20,000 annual retainer. She attends all meetings remotely from Denmark → $0 withheld, nothing on Form 1042-S (foreign-source). The next year she attends half the board days in person in Los Angeles and half remotely → 50% of the fee ($10,000) is US-source, and Denmark's unconditional article offers no relief: withhold 30% × $10,000 = $3,000. The remote half stays out of the system.

Structure 2: Conditional (allocation)

30% × the US-performed fraction. The grant itself allocates.

The signal: the treaty grants the US taxing rights over directors' fees "for services rendered in" the other (US) State. The grant is scoped by where the services are performed. Fees for services performed in the US are inside the grant, taxable, with no reduced rate. Fees for services performed elsewhere are simply outside the grant. On a split fee, the treaty itself divides the money: 30% on the US-performed share, nothing on the rest.

This structure is often described as binary: exemption kept with zero US services, "lost" in full with any. The treaty text does not support that reading. Treasury's Technical Explanations for these treaties say it in one sentence: the source state may tax nonresident directors "only with respect to remuneration for services performed in that State." (Why you can rely on this: the §861(a)(3) sourcing statute produces the identical split independently, so the allocation holds twice over in an audit.)

Eighteen treaties sit here, including Germany, France, the United Kingdom, Belgium, Italy, Spain, Slovakia, Portugal, and Mexico. Italy's article looks unconditional on its face, but Protocol ¶14 adds the express words: fees "may be taxed … only to the extent that the fees … are attributable to services performed in such other State."

A drafting footnote: Mexico, Portugal, and Spain word the grant in an inverted way, taxing fees "for services performed outside" the residence state, a grant that literally reaches third-country services. US withholding still attaches only to US-source income, so the withholdable base is the US-performed share either way. The Mexico TE states that limit expressly.

Worked example: A German producer on Acme's board earns $30,000 and attends one of four equally weighted board meetings in person in New York, working remotely otherwise. 25% of the fee ($7,500) is US-source, and that is exactly the share the treaty's grant covers: withhold 30% × $7,500 = $2,250. The remaining $22,500 is outside the grant and foreign-source, not withheld upon, not reported. Keep records supporting the 25% split (meeting locations, calendars).

The companion article, "Conditional Director Fees: The France Example," walks this structure through the France treaty in detail.

Structure 3: Australia, Thailand, Cyprus

Australia and Thailand: 30% × the US-performed fraction. Cyprus: 0% with no US meetings. Any US meeting → case-by-case review.

These three treaties are often lumped together as a single "all-or-nothing" family. Their texts work differently, none of them all-or-nothing:

Australia (Art. 15, employment article with express allocation). The treaty has no dedicated Directors' Fees article. Art. 15 sweeps in "services performed as a director of a company" and then taxes "such remuneration as is derived from that exercise or performance" in the US, allocation in the treaty's own words. The article's 183-day escape hatch does not help here: it requires the paying company not be a US resident, which fails for a US payor. Result on a split fee: 30% × the US-performed fraction.

Thailand (Art. 17: "unless … performed in Thailand"). The article's bare text reads like a cliff, but Treasury's Technical Explanation construes the US taxing right as running "only with respect to remuneration for services that are not performed in [Thailand]", an allocative scope. Result: 30% × the US-performed fraction.

Cyprus (Art. 20, a genuine excess test). Cyprus is the real outlier: its article taxes directors' fees only "to the extent such fees are in excess of a reasonable fixed amount for each day of attendance" at US board meetings, and the non-excess portion falls back to the personal-services articles, which generally exempt a director with no US fixed base and limited US days. The treaty never quantifies "reasonable," so the computation cannot be automated: with no US meetings the answer is an automatic 0%. With any US meeting, TaxCrossing routes the fee for case-by-case review of the excess (fee minus a documented per-diem times US attendance days), and where the per-diem cannot be documented, the conservative fallback is 30% on the full fee.

As always, the sourcing floor comes first: a director in any of these three countries with no US services (or, for Cyprus, no US meetings) is at 0% before any article is consulted.

Structure 4: Pro-rata

30% × the US-service fraction. The treaty itself prorates.

The signal: the treaty says the fees are taxable in the US "only… to the extent" the services were "rendered in" the US. The phrase "to the extent" is the tell. Exactly three treaties use this allocation language: the Netherlands, Sweden, and Ukraine.

Conditional treaties (Structure 2) also allocate as a treaty matter, so the remaining distinction of the pro-rata trio is simply how explicitly the treaty says it: here the words "to the extent" sit in the article itself, no construction required. The cleanest possible audit posture for a split-service director.

Worked example: A Dutch director earns $10,000 and performs 40% of her board services in the US. Withholding is 30% × 40% × $10,000 = $1,200, 30% on the $4,000 US-source share, nothing on the rest.

Structure 5: No DF article

30% on the US-source share, statutory rate. The sourcing split is the only limiter.

Twenty-six US treaty countries have no Directors' Fees article at all, the largest single group. Canada is the prime example: its dedicated directors' fees article was dropped in the 1980 consolidation of the US–Canada treaty. Romania, Austria, Norway, Poland, New Zealand, Greece, Egypt, Pakistan, Finland, Hungary (treaty since terminated), Indonesia, Morocco, the Philippines, Trinidad & Tobago, and eleven others sit in the same group.

With no article, there is no treaty relief to claim, and no treaty penalty either. The analysis is purely statutory:

• Services performed entirely outside the US → foreign-source, 0%, not reportable. A Toronto director who joins every meeting by video owes no US withholding, not because of the treaty (there is no DF article), but because §861(a)(3) sources her fee where she performed the services.
• Services performed partly or wholly in the US → the US-source share is withheld at the statutory 30% (no treaty relief exists to reduce it).

Do not confuse "no article" with "unconditional." The outcome arithmetic is the same, but the reasoning differs, and so does what you would put in an audit memo. An unconditional treaty grants the US the right to tax and offers no relief. A silent treaty simply leaves the Code to operate.

Structure 6: The Bangladesh shareholder cap

Standard conditional treatment, plus a 15% cap on the shareholder excess.

Bangladesh is unique in the network. Standard director fees follow the conditional service-location structure (Structure 2). But Art. 16(4) adds a two-tier rule for a director who is also a substantial shareholder: the portion of the fee exceeding what a non-shareholder director would be paid is treated separately and capped at 15% (per the treaty and IRS Pub. 901, the excess resembling a distribution rather than a service fee).

The 15% number is fixed by the treaty. Identifying the excess is not: it requires comparing the fee to an arm's-length director benchmark, which is fact-specific. TaxCrossing flags shareholder-director fees from Bangladesh for case-by-case review rather than automating the split.

Two rare variants

Meeting-location allocation. Ireland and Chile (only). These two treaties allocate by where the board meeting is physically held, not where services are performed generally: fees for "attendance at meetings held in" the director's home country are not US-taxable. IRS Publication 901 confirms the Irish result: "amounts received for attending meetings in Ireland are not subject to U.S. income tax." Fees for US-held meetings are US-source and taxable at 30%. Where a director's work is not a clean per-meeting structure, allocate by a reasonable, documented method, and note that meetings held entirely outside the US produce the same foreign-source 0% result the sourcing rule gives everyone.

Worked example: An Irish director earns $24,000 for four equally weighted board meetings, two held in Dublin, two in the US. The Dublin half ($12,000) is not US-taxable → 0%. The US half is withheld at 30% = $3,600.

De-minimis daily cliff. Jamaica (only). Jamaica's Art. 16 exempts US-day fees up to $400 per day of US presence (excluding reimbursed expenses), and it is a cliff, not a slide: at $400/day the US-day fees are exempt. Above it they are fully taxable at 30%. A Jamaican director paid $300 for each of 3 US board days owes nothing. At $600/day the US-day fees are withheld at 30%. No US days at all → the universal foreign-source 0%.

This article is general information for US withholding agents, not legal or tax advice. Treaty positions turn on the payee's specific facts and the current treaty text. Confirm the analysis for your situation with a qualified tax advisor before relying on it.

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This article is for general educational purposes and is not legal or tax advice. Withholding outcomes depend on the specific facts of each payment. Consult a qualified tax professional before making withholding decisions.