ARTICLE 16 — U.S. Income Tax Treaty

Directors' Fees

This Article provides that a Contracting State may tax the fees paid by a company which is a resident of that State for services performed in that State by a resident of the other Contracting State in his capacity as a director of the company. This rule is an exception to the more general rules of Article 14 (Independent Personal Services) and Article 15 (Dependent Personal Services). Thus, for example, in determining whether a non-employee director's fee is subject to tax in the country of residence of the corporation, whether the fee is attributable to a fixed base is not relevant.

The U.S. Model has no comparable provision. The preferred U.S. policy is to treat a corporate director in the same manner as any other individual performing personal servicesoutside directors would be subject to the provisions of Article 14 (Independent Personal Services) and inside directors would be subject to the provisions of Article 15 (Dependent Personal Services). The preferred German position, on the other hand, is that reflected in the

OECD Model, in which a resident of one Contracting State who is a director of a corporation which is resident in the other Contracting State is subject to tax in that other State in respect of his directors' fees regardless of where the services are performed. The provision in Article 16 of the Convention represents a compromise between these two positions. The State of residence of the corporation may tax nonresident directors with no threshold, but only with respect to remuneration for services performed in that State.

This Article is subject to the saving clause of subparagraph (a) of Paragraph 1 of the Protocol. Thus, if a U.S. citizen who is a German resident is a director of a U.S. corporation, the United States may tax his full remuneration regardless of the place of performance of his services.

The 1954 Convention contains no special rule dealing with corporate directors. They are subject to the normal rules regarding the taxation of persons performing personal services.