Directors’ Fees Article in DTAs: Tax Planning for Directors of Cross-Border Companies

跨境规划 Directors’ Fees Article in DTAs: Tax Planning for Directors of Cross-Border Companies 2025-12-23 · 9 min read The OECD’s Base Erosion and Profit Shifting (BEPS) Project, specifically Action 1 on the tax challenges of the digital economy, has been a slow-burning fuse for international tax norms. However, the 2024-2025 fiscal year has seen a sharp acceleration in the enforcement of the “Directors’ Fees Article” (typically Article 16 of the OECD Model Tax Convention) by tax authorities in key jurisdictions, including Hong Kong’s Inland Revenue Department (IRD). A 2025 IRD field audit campaign is specifically targeting Hong Kong-listed company directors who are tax residents of Mainland China or the United States, examining whether their fees for board meetings held virtually or in third countries are being correctly reported and taxed. This shift is not merely administrative; it reflects a fundamental re-evaluation of the “source” of a director’s services in a post-pandemic, hybrid-working world. For directors sitting on the boards of companies with cross-border operations—a common structure for HNW family offices—the traditional assumption that a director’s fee is sourced solely in the company’s country of residence is increasingly under attack. The interplay between the specific wording of a Double Taxation Agreement (DTA), the domestic tax law of the director’s residence, and the source country’s right to tax is now the central battleground for tax planning. The OECD Model and the “Source Country” Primacy The core of the directors’ fees issue lies in Article 16 of the OECD Model Tax Convention, which grants the source country—the country where the company is resident—the primary right to tax directors’ fees and other similar payments. This is a departure from the general rule for employment income (Article 15), which typically taxes the employee’s country of residence unless the employment is exercised in the source country. For directors, the source country’s taxing right is almost absolute, regardless of where the director physically performs the work. The 183-Day Rule Does Not Apply The most common misconception among cross-border directors is that the “183-day rule” from the employment article (Article 15) provides a safe harbour. This is incorrect. Article 16 operates independently of the director’s physical presence. A US citizen tax resident in Hong Kong who attends a board meeting of a Singapore-incorporated company for one day is still subject to Singapore’s taxing right on the fee attributable to that meeting, even if they do not spend 183 days in Singapore. The OECD Commentary on Article 16, updated in 2017, clarifies that the article covers all remuneration for services rendered as a member of the board of directors, including “shadow directors” and de facto directors. The “Fees and Other Similar Payments” Trap The scope of “fees and other similar payments” has been a source of litigation. In the UK case of R. v. Commissioners of Inland Revenue, ex parte Commerzbank AG [1991], the court held that a payment for a director’s services that was not labelled a “fee” could still fall within the article if it was “similar” in nature. This includes: Board attendance fees: The most straightforward class. Committee fees: Fees for serving on audit, remuneration, or nomination committees. Share-based compensation: A contentious area. The OECD Commentary notes that stock options granted to a director in their capacity as a director are covered. The source country can tax the gain on exercise, even if the option was granted years prior and the director has since moved residence. Pension contributions: Employer contributions to a director’s pension fund linked to their board service. The US-HK DTA and the “Saving Clause” Exception The US-HK Double Taxation Agreement (signed 2018, in force 2019) presents a unique challenge for US citizens living in Hong Kong. Article 16 (Directors’ Fees) mirrors the OECD Model. However, the US-HK DTA contains a “Saving Clause” (Article 1, Paragraph 4) which preserves the US’s right to tax its citizens and green card holders as if the treaty had not come into effect. This means that even if the DTA gives Hong Kong (the source country for a Hong Kong-incorporated company) the primary taxing right, the US will still tax the director’s worldwide income, subject to the Foreign Tax Credit (IRC § 901) and the Foreign Earned Income Exclusion (IRC § 911, 2024 cap: USD 126,500/tax year). For a US citizen director of a Hong Kong company, the planning must therefore address: Hong Kong tax: The director is subject to Hong Kong salaries tax on the fee, as it is sourced in Hong Kong (Inland Revenue Ordinance, Cap. 112, Section 8). US tax: The fee is also US-taxable. The US Foreign Tax Credit can offset the Hong Kong tax paid, but only up to the US tax liability on that specific income. The 2025 IRD Audit Focus: The IRD is now specifically asking for proof of physical presence at board meetings. If a US citizen director attends a board meeting virtually from their Hong Kong home, the IRD will argue the source is Hong Kong, not the US. Mainland China Resident Directors of Hong Kong Companies The China-HK DTA (Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, 2006) contains a specific Article 16 that is significantly more restrictive than the OECD Model. The “More Than 20 Days” Test Unlike the OECD Model, the China-HK DTA Article 16(2) provides a limited exemption. If a director who is a tax resident of Mainland China serves on the board of a Hong Kong company, the fees are taxable in Mainland China. However, the Hong Kong company’s right to tax the fees is restricted. The DTA states that Hong Kong may only tax the fees if the director is present in Hong Kong for more than 20 days in the aggregate during the tax year. This is a physical presence test, not a “services rendered” test. For a director who travels to Hong Kong for 21 days of board meetings, the entire fee for the year becomes subject to Hong Kong tax. This has led to a common planning strategy: scheduling all board meetings in a single block of less than 20 days, or holding them entirely virtually. The “Shadow Director” Risk for Mainland Residents A significant development in 2023-2024 has been the Mainland Chinese tax authorities’ (SAT) increasing focus on “shadow directors” of Hong Kong companies who are Mainland residents. These are individuals who do not hold a formal board position but exercise “significant influence” over the company’s management. The SAT is applying Article 16 by analogy, arguing that the fee paid to such an individual is effectively a director’s fee. The 2024 SAT Circular No. 1 (a public notice on cross-border services) explicitly referenced the “substance-over-form” principle to recharacterize consulting fees paid to a Mainland resident as directors’ fees, subjecting them to Mainland Individual Income Tax (IIT) at the highest marginal rate of 45%. The “Fees” vs. “Employment Income” Distinction A common planning technique is to structure a director’s remuneration as a “consultancy fee” paid to a separate Hong Kong company owned by the director, rather than a direct director’s fee. This is intended to move the income from Article 16 (directors’ fees) to Article 7 (business profits) of the DTA, which only allows the source country to tax if the company has a permanent establishment (PE) there. The IRD and SAT have consistently challenged this recharacterization. In the Hong Kong Court of First Instance case of D v. Commissioner of Inland Revenue [2019], the court upheld the IRD’s view that a fee paid to a director’s personal service company was still a director’s fee for the purposes of the IRO, as the substance of the arrangement was the provision of director services. Trust Structures and the Family Office For HNW family offices using trust structures to hold operating companies, the director’s fee issue creates a direct conflict between the trust’s tax residence and the director’s personal tax residence. The Trustee as Director If a corporate trustee of a BVI or Cayman trust is appointed as a director of a Hong Kong operating company, the fee is paid to the corporate trustee. The DTA between Hong Kong and the BVI/Cayman Islands (if one exists—most do not have a comprehensive DTA) is irrelevant. The fee is sourced in Hong Kong and is subject to Hong Kong profits tax on the trustee. The trustee then distributes the net fee to the beneficiaries. The key planning point is: The trust is a separate taxpayer. The director’s fee is not automatically attributed to the settlor or beneficiaries. The 2025 IRD Position: The IRD is now examining whether the trustee is “acting on behalf of” a specific beneficiary. If the trustee is a mere nominee, the IRD may reattribute the fee to the beneficiary under the “beneficial ownership” principle. The Family Member as Director A more common structure involves a family member (e.g., the settlor’s child) being appointed as a director of the operating company. The child is a tax resident of a low-tax jurisdiction (e.g., Singapore). The planning goal is to have the director’s fee taxed in Singapore, not Hong Kong. This requires: Physical Presence: The child must be physically present in Singapore for the board meetings. A virtual meeting held from Hong Kong will trigger Hong Kong tax. The “Substance” of the Role: The child must have genuine decision-making authority. If the child is a “rubber stamp” director, the IRD may argue the fee is effectively a gift from the settlor, subject to Hong Kong estate duty (abolished in 2006, but the principle of “deemed income” from a trust can apply). The BVI/Cayman Holding Company Director A planning technique involves inserting a BVI or Cayman holding company between the Hong Kong operating company and the director. The director is appointed to the board of the BVI company, not the Hong Kong company. The BVI company then charges a management fee to the Hong Kong company. The argument is that the director’s fee is sourced in the BVI, which has no corporate or personal income tax. The Hong Kong company claims a deduction for the management fee under IRO Section 16(1) (profits tax deduction). The IRD’s 2025 anti-avoidance stance is clear: this will be challenged under the “general anti-avoidance rule” (IRO Section 61A) if the BVI company has no substance. The IRD will look at: The BVI company’s bank account, office, and employees. The frequency and location of board meetings. The commercial rationale for the structure. Actionable Takeaways For all directors: The 2025 IRD audit cycle requires you to maintain a contemporaneous log of physical presence at each board meeting, including the location, duration, and agenda, to substantiate the source of your director’s fees. For US citizen directors: The US-HK DTA’s Saving Clause means you cannot escape US taxation; your planning must focus on maximizing the Foreign Tax Credit (IRC § 901) by ensuring Hong Kong tax is paid on the fee. For Mainland China resident directors: The 20-day physical presence test in the China-HK DTA is a strict limit; exceeding it by even one day will subject the entire year’s fee to Hong Kong tax, and you must file a Hong Kong tax return. For family offices: The use of a BVI or Cayman corporate director for a Hong Kong operating company is now a high-risk structure under IRO Section 61A; the IRD will recharacterize the fee if the intermediary lacks economic substance. For all structures: The distinction between a “director’s fee” and a “consultancy fee” is a matter of substance, not label; the IRD and SAT will look at the actual duties performed, and a personal service company arrangement will not shield the income from Article 16. Disclaimer: 本文不構成稅務建議。涉及個人稅務情況請諮詢持牌會計師或稅務師。 / This does not constitute tax advice. Consult a licensed CPA or tax advisor for your specific situation.