Skip to content

COMMENTARY ON Article 16

CONCERNING THE TAXATION OF DIRECTORS’ FEES

1. This Article relates to remuneration received by a resident of a Contracting State, whether an individual or a legal person, in the capacity of a member of a board of directors of a company which is a resident of the other Contracting State. Since it might sometimes be difficult to ascertain where the services are performed, the provision treats the services as performed in the State of residence of the company.(Amended on 11 April 1977 see History)

1.1 Member countries have generally understood the term “fees and other similar payments” to include benefits in kind received by a person in that person’s capacity as a member of the board of directors of a company (e.g.stock-options, the use of a residence or automobile, health or life insurance coverage and club memberships).(Amended on 15 July 2005 see History)

2. A member of the board of directors of a company often also has other functions with the company,e.g.as ordinary employee, adviser, consultant, etc. It is clear that the Article does not apply to remuneration paid to such a person on account of such other functions.(Replaced on 11 April 1977 see History)

3. In some countries organs of companies exist which are similar in function to the board of directors. Contracting States are free to include in bilateral conventions such organs of companies under a provision corresponding to Article 16.(Added on 11 April 1977 see History)

3.1 Many of the issues discussed under paragraphs 12 to 12.15 of the Commentary on Article 15 in relation to stock-options granted to employees will also arise in the case of stock-options granted to members of the board of directors of companies. To the extent that stock-options are granted to a resident of a Contracting State in that person’s capacity as a member of the board of directors of a company which is a resident of the other State, that other State will have the right to tax the part of the stock-option benefit that constitutes director’s fees or a similar payment (see paragraph 1.1 above) even if the tax is levied at a later time when the person is no longer a member of that board. While the Article applies to the benefit derived from a stock-option granted to a member of the board of directors regardless of when that benefit is taxed, there is a need to distinguish that benefit from the capital gain that may be derived from the alienation of shares acquired upon the exercise of the option. This Article, and not Article 13, will apply to any benefit derived from the option itself until it has been exercised, sold or otherwise alienated (e.g.upon cancellation or acquisition by the company or issuer). Once the option is exercised or alienated, however, the benefit taxable under this Article has been realised and any subsequent gain on the acquired shares (i.e.the value of the shares that accrues after exercise) will be derived by the member of the board of directors in his capacity of investor-shareholder and will be covered by Article 13. Indeed, it is at the time of exercise that the option, which is what the director obtained in his capacity as such, disappears and the recipient obtains the status of shareholder (and usually invests money in order to do so).(Added on 15 July 2005 see History)

Reservations on the Article4. Estoniareserves the right to tax under this Article any remuneration of a member of a board of directors or any other similar organ of a resident company.(Added on 15 July 2014 see History)

5. TheUnited Stateswill require that any tax imposed on such fees be limited to the income earned from services performed in the country of source.(Replaced on 23 July 1992 see History)

6. Belgiumreserves the right to state that remuneration that a person dealt with in Article 16 receives in respect of daily activities as well as remuneration that a partner of a company, other than a company with share capital, receives in respect of his personal activities for the company shall be taxable in accordance with the provisions of Article 15.(Amended on 15 July 2005 see History)

7. Greecereserves the right to apply Article 16 to remuneration of a partner who acts in the capacity of a manager of a Greek limited liability company or of a Greek partnership.(Added on 21 September 1995 see History)

Paragraph 1Amended when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 1 read as follows:“1. Article 16 relates to remuneration received by a resident of a Contracting State, whether an individual or a legal person, in the capacity of a member of a board of directors of a company which is a resident of the other Contracting State. Since it might sometimes be difficult to ascertain where the services are performed, the provision treats the services as performed in the country of residence of the company.”

Paragraph 1.1Amended on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005, on the basis of another report entitled “Cross-border Income Tax Issues Arising from Employee Stock-Option Plans” (adopted by the OECD Committee on Fiscal Affairs on 16 June 2004). After 23 October 1997 and until 15 July 2005, paragraph 1.1 read as follows:“1.1 Member countries have generally understood the term “fees and other similar payments” to include benefits in kind received by a person in that person’s capacity as a member of the board of directors of a company (e.g.the use of a residence or automobile, health or life insurance coverage and club memberships).”

Paragraph 1.1 was added on 23 October 1997 by the report entitled “The 1997 Update to the Model Tax Convention”, adopted by the OECD Council on 23 October 1997.

Paragraph 2Replaced when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977. At that time, paragraph 2 of the 1963 Draft Convention was deleted and a new paragraph 2 was added. In the 1963 Draft Convention (adopted by the OECD Council on 30 July 1963) and until the adoption of the 1977 Model Convention, paragraph 2 read as follows:“2. Canada reserves its position with regard to this Article. When negotiating Conventions with other Member countries, the Canadian authorities would wish to have directors’ fees included with remuneration and salary under Article 15.”

Paragraph 3Added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 3.1Added on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005, on the basis of another report entitled “Cross-border Income Tax Issues Arising from Employee Stock-Option Plans” (adopted by the OECD Committee on Fiscal Affairs on 16 June 2004).

Paragraph 4Added on 15 July 2014 by the Report entitled “The 2014 Update to the Model Tax Convention”, adopted by the Council of the OECD on 15 July 2014.

Paragraph 4 as it read before 17 July 2008 was deleted by the report entitled “The 2008 Update to the Model Tax Convention”, adopted by the OECD Council on 17 July 2008. In the 1977 Model Convention and until 17 July 2008, paragraph 4 read as follows:“4. Portugalreserves the right to tax under Article 15 any remuneration of a member of the board of directors or of any other body of a company, for the carrying out of a permanent activity.”

Paragraph 4 was added and the preceding heading was moved from immediately before paragraph 2 to immediately before paragraph 4 when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 5Replaced on 23 July 1992 when paragraph 5 of 1977 Model Convention was deleted and a new paragraph 5 was added by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992. In the 1977 Model Convention and until 23 July 1992, paragraph 5 read as follows:“5. TheUnited Statesreserves its position with regard to this Article. The United States believe that directors’ fees should be subject to tax under Article 14.”

Paragraph 5 was added when the 1977 Model Convention was adopted by the OECD Council on 11 April 1977.

Paragraph 6Amended on 15 July 2005 by the report entitled “The 2005 Update to the Model Tax Convention”, adopted by the OECD Council on 15 July 2005, on the basis of another report entitled “Cross-Border Income Tax Issues Arising From Employee Stock Option Plans” (adopted by the OECD Committee on Fiscal Affairs on 16 June 2004). After 28 January 2003 and until 15 July 2005, paragraph 6 read as follows:“6. Belgiumreserves the right to also apply Article 16 to remuneration derived from functions which are other than that of an administrator or commission member but which are treated as such under Belgian domestic law. Also, Belgium wishes to apply Article 15, and not Article 16, not only in respect of remuneration for daily activities received by persons performing the functions of an administrator or commission member or similar functions, but also to remuneration derived by partners in commercial entities other than limited companies and companies limited by shares from their personal activities.”

Paragraph 6 was previously amended on 28 January 2003 by the report entitled “The 2002 Update to the Model Tax Convention” adopted by the OECD Council on 28 January 2003. After 23 July 1992 and until 28 January 2003, paragraph 6 read as follows:“6. Belgiumreserves the right to also apply Article 16 to remuneration derived from functions which are other than that of an administrator or commission member but which are treated as such under Belgian domestic law. Also, Belgium wishes to apply Article 15, and not Article 16, not only in respect of remuneration for daily activities received by persons performing the functions of an administrator or commission member or similar functions, but also to remuneration derived by partners in a Belgian partnership from their personal activities.”

Paragraph 6 was added on 23 July 1992 by the report entitled “The Revision of the Model Convention”, adopted by the OECD Council on 23 July 1992.

Paragraph 7Added on 21 September 1995, by the report entitled “The 1995 Update to the Model Tax Convention” adopted by the OECD Council on 21 September 1995.