Directors' Fees and U.S. Tax Exposure for Italian-Owned U.S. Companies

Italian groups with U.S. subsidiaries frequently appoint Italian executives or shareholders to serve as directors of their U.S. entities. While this governance structure is common, directors' fees paid to non-U.S. individuals can create unexpected U.S. tax and compliance obligations — particularly when directors perform their role remotely or travel occasionally to the United States.

From a U.S. perspective, directors' fees raise questions around:

• sourcing of compensation
• federal withholding obligations
• reporting requirements
• income tax treaty relief

These issues are often misunderstood, leading either to unnecessary withholding or — more commonly — to missed compliance.

1. The Threshold Question: Where Are the Services Performed?

Under U.S. domestic tax law, compensation for personal services is sourced based on where the services are physically performed. This is the starting point for the entire analysis. It does not depend on:

• the residence of the director
• the nationality of the individual
• the location of the parent company
• where the fees are booked or paid

Directors performing services remotely from abroad

Where a non-U.S. director participates in board or committee meetings exclusively from outside the United States (e.g., via videoconference) and does not travel to the United States during the year for board-related activities, the related services are generally treated as performed outside the United States.

In those circumstances, the directors' fees are foreign-source income under U.S. law and are not subject to U.S. federal withholding, even if paid by a U.S. subsidiary.

In purely remote scenarios, U.S. income tax treaties are typically not relevant, because the income does not fall within the U.S. tax base in the first place.

2. When U.S. Tax Exposure Is Triggered

U.S. tax exposure arises when any portion of the directors' services is physically performed in the United States. In our experience, this comes up more often than expected — a director flying in for a board meeting, participating in a strategy session, or combining governance duties with a site visit.

In these cases:

• the portion of the fees attributable to U.S. service days becomes U.S.-source income
• allocation between U.S. and non-U.S. days is generally required
• U.S. withholding and reporting obligations may apply

Even a limited number of U.S. days can be sufficient to trigger compliance requirements.

3. Limited Usefulness of Statutory Exemptions

The Internal Revenue Code contains a narrow statutory exemption for short-term services performed in the United States. In practice, this exception is rarely helpful for directors because the compensation threshold is extremely low and structural requirements are often not met when fees are paid by a U.S. company.

As a result, once services are performed in the United States, statutory exemptions typically do not eliminate withholding obligations.

4. Treaty Considerations Under the U.S.–Italy Convention

Once directors' fees are treated as U.S.-source under domestic law, the next step is to determine whether the applicable income tax treaty limits the United States' right to tax the income.

One aspect that catches many Italian groups off guard: the U.S.–Italy income tax treaty does not contain a standalone "Directors' Fees" article. Instead, directors' fees are generally analyzed under provisions addressing independent personal services or business profits, depending on the specific facts.

Treaty relief may be available where, for example:

• the director does not have a fixed base in the United States
• U.S. presence remains limited
• applicable treaty thresholds are not exceeded

However, treaty relief:

• is not automatic
• requires proper documentation
• does not eliminate U.S. reporting obligations

Even where treaty protection applies, Forms 1042 and 1042-S are generally still required, and treaty claims must be properly supported (e.g., through Form 8233).

5. U.S. Withholding and Reporting Obligations

When directors' fees are paid to a non-U.S. individual and are attributable to U.S. services, the U.S. subsidiary typically acts as the withholding agent. Absent a documented exemption:

• 30% federal withholding generally applies
• Form 1042 must be filed
• Form 1042-S must be issued to the director

Whether the income is characterized as effectively connected income (ECI) or as FDAP income does not change the company's withholding or reporting obligations.

We frequently see U.S. subsidiaries adopt conservative positions — such as withholding on 100% of directors' fees — to reduce audit risk. While this may be a reasonable internal risk-management decision, it should not be confused with the underlying sourcing rules and often results in unnecessary compliance burdens for directors.

6. Director-Level Filing Considerations

When directors' fees are treated as U.S.-source and effectively connected with a U.S. trade or business, the director may be required to:

• obtain a U.S. taxpayer identification number (ITIN)
• file Form 1040-NR
• recover any excess withholding through the U.S. tax return process

Treaty relief may reduce or eliminate the ultimate tax liability, but it does not eliminate filing requirements.

7. Why a Documented U.S. Tax Position Matters

Issues with directors' fees typically arise not because the rules are unclear, but because the analysis is never performed. We see this pattern regularly: assumptions are made based on residency rather than physical presence, and treaty protection is assumed without documentation.

A clear, written U.S. tax position allows companies to:

• apply consistent treatment year over year
• avoid unnecessary withholding and filings
• support decisions during audits or due diligence
• align internal stakeholders on a defensible approach

Closing Observations

Directors' fees paid to non-U.S. individuals are not inherently problematic from a U.S. tax perspective. However, remote governance, occasional U.S. travel, and cross-border payments require careful analysis.

The correct U.S. tax treatment depends primarily on:

• where the services are physically performed
• whether any portion of the activity takes place in the United States
• whether treaty relief is available and properly documented

Addressing these questions upfront — and documenting the conclusions — is significantly more efficient than correcting issues after payments have been made.

This article is for general informational purposes and does not constitute tax or legal advice. Specific situations should be evaluated on a case-by-case basis.