Directors moving abroad and double tax treaties

Directors moving abroad should ensure that they carefully consider their tax status. The terms of double tax treaties in particular can have a big impact on how directors are taxed. At the outset it's important to differentiate between company directors in their capacity as an officer of the company and other directors who are directors in name only. Company Directors are legal officers of the company, however companies frequently give employees the title 'Director' without them actually being 'Company Directors'. Directors are essentially taxed as employees of the company. Therefore a UK resident Director is subject to income tax on his worldwide income. This applies irrespective of the residence of the company that the Director works for. What about Directors going overseas? Directors of UK resident companies may decide to live and work overseas. When they leave the UK they will cease to be UK resident and outside the scope of UK tax on overseas income. UK income would however still be within the charge to UK income tax. One of the good tax reasons why Directors move overseas is to avoid income tax on their salary but still obtain a UK tax deduction on any salary in the UK company. Directors who go overseas will frequently look to double tax treaties to assess how this will impact on their taxes. Many double tax treaties have a specific article on 'Directors fees'. These state that a resident of one country who is a director of a company which is a resident of the other country may be taxed in that other country on his fees. Directors' fees are the income which arises to a Director in his capacity as a member of the Board of Directors. This therefore provides that both countries can tax the Directors fee. They would then look at claiming double tax relief under the treaty to prevent double taxation. Other earnings of a Director (ie in his capacity as an employee) are subject to a different article in the treaty. The dependent personal services (employment) article would apply to this income. In a few agreements there is no separate Directors' fees Article but a provision on similar lines is incorporated in the dependent personal services Article. This Article states that income, derived by a resident of one country, is taxable only in that country unless he exercises his employment in the other country. If he does, then the other country can tax so much of his earnings as is derived from the exercise of his employment in that country. So the general rule is that as for Directors fees above both the country of residence and the country where the company is located could tax the Directors employment income. Under agreements which follow the current OECD Model convention, the Director escapes tax in the other country (that is, the country in which the employment is exercised) if he fulfils all four of the following conditions: a. he is not a resident of the other country for the purposes of the agreement under which the claim is made for the period of the claim, and
b. he is present in the other country for a period or periods not exceeding in the aggregate 183 days in any continuous period of twelve months
c. his earnings are paid by an employer who is not a resident of that other country, and
d. his earnings are not borne by a permanent establishment or fixed base which the employer has in the other country. Directors going overseas frequently look to extract cash as a salary and get a dual tax benefit of a tax free salary and a tax deduction in the company. In order to get a salary free of tax the Director would need to carry out the employment overseas and be non UK resident. Therefore fees in a capacity as a UK Director would be taxed as above and would remain subject to UK income tax. However, provided the duties that the Director actually carried out as an employee were overseas there would be no UK tax. If the duties were UK duties you would then look at the double tax treaty position above to assess where tax would fall. Tax deduction in the company The other issue is the tax deduction in the company. The company obtains a corporation tax deduction for all expenses incurred 'wholly & exclusively' for the purposes of the trade. Therefore providing the payment to the Director is a genuine employment for services that he provides to the company it should be allowable. The fact that the Director is non resident would not impact on this providing the company obtained a trading benefit from the salary (eg negotiating overseas orders etc).