3.3.3.10 Art. 16 OECD MTC: Directors’ fees

Art. 16 OECD MTC is aimed at the division of the taxing rights with respect to directors’ fees. The OECD justifies the existence of the provision by referring to difficulties in determining the place of employment of directors. The article applies to residents of treaty countries who work as directors for companies established in the other treaty country. The provision applies to natural persons as well as to entities holding directorships.1 It is irrelevant for the application of the provision whether the activities are performed as a natural person or legal entity. Art. 16 OECD MTC thus takes into account that different entities can be affiliated with each other.

Art. 16 OECD MTC assigns the taxing rights in respect of directors’ fees to the state of residence of the entity in which the directorship is held, without regard to the place where the activities are carried out.2 The OECD MTC does not define the term director. Differences in legal systems may lead to different interpretations.3 Depending on a country’s legal system, the persons to whom a directors’ provision applies may differ. When concluding tax treaties, it is therefore important to align the article with the laws of both states,4 or to include a protocol provision with an explanatory statement.

In addition to fees in cash the article covers benefits in kind.5 The directors’ article only covers fees received ‘in the capacity of’ director. For instance, if a body that holds directorships also performs work as an ordinary employee, the fee received in that capacity does not fall within the scope of art. 16 OECD MTC.6 So there is no question of a force of attraction; it is only about the fee that is purely attributable to the activities performed as a director. In concrete terms, this means that a distinction must be made between the fees received. For an entity, art. 7 OECD MTC will be applicable with regard to any other fees received.

The directors’ fees may be taxed in the source state. In the source state, therefore, there is single taxation. However, the directors’ fees may also be taxed at the level of the state of residence of the company performing management activities, and the state of residence must provide for the elimination of double taxation.7 So, in principle, the provision appears to be in line with the aim and purpose of tax treaties: there is no question of double taxation, nor of creating opportunities for non-taxation or reduced taxation through tax avoidance. In this context, it is required that both Contracting States give the same interpretation to the directors’ clause. This is of course a conditio sine qua non for all provisions of the OECD MTC. Still, because the term director is interpreted differently in different countries, differences in application of art. 16 OECD MTC may occur more often. In addition, the absence of a subject-to-tax requirement may lead to double non-taxation.