USA compliance for non-US directors

I performed targeted searches and scraped authoritative sources (IRS, FinCEN, major law firms and tax advisers) to compile comprehensive, actionable guidance for U.S. businesses (including LLCs and corporations) that appoint non‑U.S. (foreign) directors. Below is a consolidated summary of the compliance issues, practical steps, and state-level considerations you need to address. Key federal compliance areas and practical guidance 1) Tax withholding, reporting, and director filing obligations - Withholding agent responsibilities: Payments to non‑U.S. persons that are U.S.‑source may be subject to chapter 3 (nonresident alien) or chapter 4 (FATCA) withholding. Withholding agents (U.S. or foreign payers) generally must file Form 1042 (annual return) and Form 1042‑S for amounts subject to chapter 3 withholding or chapter 4 reportable amounts. (IRS Pub. 515) - Director fees and sourcing: Director fees are often sourced to the U.S. if the services are performed in the U.S. Days spent attending U.S. meetings may create U.S.‑source income subject to 30% withholding (FDAP) unless a treaty reduces/exempts it, or the income is treated as effectively connected income (ECI) requiring graduated rates. (Cummings; Baker McKenzie; Tax Adviser; Pub. 515) - Treaty relief & Form 8233/W‑8: Directors may claim treaty exemptions via Form 8233 (for certain personal services/treaty claims) or by providing an appropriate Form W‑8 (e.g., W‑8BEN) to the payer. Even when treaty relief applies, the payer generally must still file Forms 1042/1042‑S and follow withholding procedures. (IRS Form 8233; Pub. 515; Tax Adviser) - Director U.S. filing: Nonresident directors receiving U.S.‑source compensation commonly must file Form 1040‑NR to reconcile withholding and claim refunds or treaty benefits; an ITIN (Form W‑7) will usually be required if the director has no SSN. (Tax Adviser; IRS W‑7) - Payroll vs. non‑employee treatment: Directors are often independent contractors (non‑employees) for U.S. payroll purposes, so payment/reporting differs from wages. Check whether payments are wages (W‑2) or nonemployee compensation. (Pub. 515) Practical steps for tax compliance - Before first payment: obtain completed W‑8BEN (or W‑8BEN‑E for entities) or Form 8233 if claiming treaty exemption; gather director’s country of residence and withholding/treaty documentation. (IRS forms) - Withholding agent setup: ensure you (or your payroll/agent) can withhold at statutory rates, file Forms 1042/1042‑S timely, and e‑file if thresholds require. Obtain or confirm EIN for any payer entity required to file. (Pub. 515; Form 1042‑S information) - ITIN: support the director in applying for an ITIN (Form W‑7) when required; without it treaty claims and refund claims are difficult. (IRS W‑7) - Director filings and gross‑up policy: inform directors they likely must file Form 1040‑NR; consider gross‑up policies for withholding or treaty uncertainty. 2) Entity and information reporting (beneficial ownership / BOI and other information returns) - FinCEN BOI: As of March 26, 2025, FinCEN issued an interim final rule narrowing "reporting company" definition — U.S. domestic companies (entities formed in the U.S.) were exempted from BOI reporting under that rule; foreign entities registered in the U.S. remained subject to BOI reporting with specific deadlines for filing. Confirm current BOI obligations for foreign entities that register to do business in the U.S. (FinCEN BOI alert). (FinCEN) - Other entity-level reporting (e.g., Form 5472): Certain reportable transactions and foreign ownership structures can create entity-level information returns (Form 5472 for 25% foreign‑owned U.S. corporations or certain reportable transactions). Determine whether entity structure (e.g., foreign‑owned DRE/SME LLC or corporation) triggers Form 5472 or other filings and seek tax counsel early. (IRS Form 5472 page) 3) Corporate governance, fiduciary duties, litigation risk and operational controls - Director eligibility and duties: Most states do not bar non‑U.S. citizens from serving as directors; however, directors owe the same fiduciary duties (care, loyalty, oversight) regardless of citizenship, and may face derivative suits or personal exposure. Companies should confirm state law and charter/bylaws for any special provisions. (Cummings law excerpt) - Indemnification, D&O insurance, and consent to service: Provide robust indemnification agreements, D&O coverage, and consider consent to service of process clauses to manage cross‑border litigation risk. Verify enforceability and any carve‑outs. (Cummings) - Export controls and sanctions screening: Non‑U.S. directors may trigger export control (EAR/ITAR deemed exports) or sanctions concerns, particularly in sensitive industries. Conduct restricted‑party and sanctions screening and map what board materials may be restricted. (Cummings) - Meeting logistics & tax/state nexus: Meeting locations (U.S. in‑person attendance) can affect tax sourcing and state‑level nexus. Use remote participation policies, written consents, and document location and nature of services to substantiate sourcing. (Cummings; Pub. 515) 4) State‑level compliance highlights (what US business owners/LLC founders should check) - Registered agent and filings: All states require a registered agent and periodic filings (annual reports/franchise tax) — confirm in each state where entity is formed or registered to do business. Failure to maintain registered agent status or file can lead to default/forfeiture. (State SOS pages — e.g., CA SOS reference) - Director residency: Most states do not impose citizenship/residency requirements for directors (Delaware widely permissive), but check charter/bylaws and any industry‑specific rules (CFIUS, state licensing). (Cummings; state corp law guidance) - State tax differences: States vary in recognizing treaty exemptions — some states (e.g., California) may not conform to federal treaty positions, creating state filing obligations. Track meeting locations that may create state income tax filing duties for non‑resident directors. (Tax Adviser; Pub. 515) 5) Practical onboarding checklist for appointing non‑U.S. directors (actionable for US business owners / LLC founders) - Pre‑appointment due diligence - Sanctions and restricted party screening; export control assessment (EAR/ITAR) for technology/defense/advanced sectors. (Cummings) - Conflicts-of-interest, independence questionnaire, KYC and identity verification. - Governance documents & insurance - Update/confirm bylaws, consent-to-service, exclusive forum provisions, indemnification agreements and D&O coverage that expressly cover foreign directors and cross‑border enforcement. (Cummings) - Tax & payroll onboarding - Collect W‑8BEN (or W‑8BEN‑E for entities) or Form 8233 if claiming treaty relief; record director’s country of residence and passport/ITIN info. (IRS 8233, Pub. 515) - Determine withholding approach; set up payroll or accounts payable process to withhold (or gross up) and to prepare Forms 1042 and 1042‑S. Obtain EIN for payer entity if needed. (Pub. 515; Form 1042‑S) - Assist with ITIN (W‑7) application if director lacks SSN. (IRS W‑7) - Ongoing compliance & recordkeeping - Track board meeting locations/days to support sourcing allocations. Keep minutes showing remote participation and documents used. (Cummings) - Periodically rescreen for sanctions and export controls; maintain training on insider trading and cybersecurity tailored for international directors. (Cummings) - Review entity‑level reporting (BOI/FinCEN status, Form 5472 exposure) when ownership, registration or transactions change. (FinCEN; IRS Form 5472) - Engage specialists: cross‑border tax counsel and payroll provider with international withholding experience; securities counsel if public/regulated. (Multiple sources) Common pitfalls to avoid - Assuming remote board service eliminates U.S. tax exposure — it may not; attendance and services performed in the U.S. can create taxable U.S.‑source income. (Cummings; Tax Adviser) - Ignoring state tax and reporting differences — many states don’t follow federal treaty positions and can impose filing obligations. (Tax Adviser; Pub. 515) - Failing to collect proper withholding documentation (W‑8, 8233) before payment — that exposes the company to withholding and reporting penalties. (Pub. 515; Form 8233) - Overlooking export controls, sanctions, and industry‑specific restrictions that may limit what information a foreign director can receive. (Cummings) Next steps and recommendations for your audience (US business owners / LLC founders) 1. Add a cross‑border onboarding checklist to your director onboarding pack that includes sanctions screening, W‑8/8233 collection, ITIN support, indemnity/D&O review, and a record of expected meeting locations. 2. Engage a cross‑border tax advisor to determine withholding treatment for director fees, treaty analysis, and whether the entity’s structure triggers Form 5472 or other information returns. 3. Confirm FinCEN BOI obligations for entities that are foreign reporting companies and monitor FinCEN guidance given regulatory changes. 4. Update bylaws/consents and verify D&O insurance explicitly covers foreign directors. 5. If the company is in a regulated industry or likely to implicate CFIUS, consult national‑security counsel early.