Non-UK resident directors bring valuable experience to UK boards that can help businesses expand their global reach.
However, they can also bring with them a host of tax consequences that can catch companies and individuals out if not properly prepared for.
UK rules treat directors as employees for Income Tax purposes, which means duties performed in the UK can attract UK tax and payroll obligations even when the director lives and is paid abroad.
As such, it is worth businesses understanding how double tax treaties work so that they are not exposed to more obligations than necessary.
Why might the UK tax apply to a director who lives overseas?
Under UK law, remuneration linked to duties carried out in the UK is generally taxable here.
If a director attends board meetings in the UK, oversees local operations, negotiates contracts on UK soil or otherwise performs substantive duties in the country, HMRC can assess the portion of pay that relates to those UK activities.
HMRC consider the full scope by which a person is compensated for their work, including:
There is also potential for UK companies to be required to operate PAYE on the UK portion of incomes, even when the director is paid by overseas entities.
Alongside this, National Insurance Contributions (NICs) may apply as these are determined primarily by physical presence.
Even in cases when Income Tax relief is available, NIC liabilities may still arise.
Where does double taxation risk come from?
Many countries tax residents on worldwide income, so a director may face tax in their country of residence as well as in the UK.
Without treaty relief, that can mean the same income is taxed twice.
Double Taxation Agreements (DTAs) allocate taxing rights and typically allow the director’s country of residence to give credit for tax paid in the UK or to exempt the income locally.
The specifics of individual reliefs depend on the exact wording of the treaty and on how the director’s duties and remuneration are structured.
How do you establish which country has treaty residence?
Given that the UK has double tax treaties with more than 130 countries, there is a reasonable chance that there will be some relief available.
While the agreements exist to prevent double taxation, many of the treaties include specific directors’ fees articles that permit the UK to tax fees paid by UK companies.
Where income is taxed in both countries, the director’s country of residence will usually provide relief by:
For individuals who are registered as a tax resident in two countries, they will be considered a dual resident.
For them, the treaty’s tiebreaker tests determine treaty residence.
The tests often consider:
Taxing rights are then allocated to the country that is designated as the individual’s tax residence in accordance with these rules.
How can you claim treaty relief?
Relief is not automatic and directors may need to:
It may also be possible to reclaim even when UK PAYE has been applied, but treaty protection limits UK tax.
Where a UK company bears the cost of remuneration, it is important to consider how this may affect treaty outcomes and PAYE obligations.
Our team are on hand to help you understand the tax obligations of a non-UK director so that you can stay compliant.
Get in touch today to learn more about UK taxation and double tax treaties.
