California nonresident board members of companies based in California may soon be subject to income tax in California, regardless of whether they perform services within the state, if a newly proposed tax regulation is adopted. The proposed regulation — new section 17951-8 of Title 18 of the California Code of Regulations — released by the Franchise Tax Board of California on September 24, 2020, treats the compensation of a California nonresident, non-employee director of a corporation as California-source income subject to California personal income tax if the corporation’s commercial domicile is in California. A corporation’s “commercial domicile” is “the principal place from which the trade or business of the taxpayer is directed or managed.” 

The proposed regulation would codify the Franchise Tax Board’s current position, as outlined in Chief Counsel Ruling 2019-03, issued on October 7, 2019 (the “Ruling”). The Ruling held that the California-source income of a nonresident, non-employee director should be determined in accordance with the market-based sourcing rules set forth in the Uniform Division of Income for Tax Purposes Act rather than based on whether the director attended board or shareholder meetings in California. Under the market-based sourcing rules, fees for providing a service are sourced to the location where the benefit of the service is received. As applied to non-employee director services, the Ruling concluded that since the board gives authority to and directs management to act, the benefit from such director services is received by the corporation in the location where the corporation’s highest-ranking corporate officers carry out these directions. Therefore, the fees or other compensation paid to such directors would be sourced to California if the corporation’s highest-ranking corporate officers implement the determinations of the directors in California. 

Under the somewhat more objective test of the proposed regulation, it appears that California nonresident, non-employee directors of companies with principal executive offices in California would be fully subject to California income taxes on their board compensation, regardless of where the non-employee director resides or where the company’s board meetings are held.

The proposed regulation contemplates that all of the board compensation must be sourced to California and does not appear to accommodate any apportionment for services performed by the director in other states. If the proposed regulation becomes law, in light of the potential for double taxation, California non-resident, non-employee directors who are subject to income tax for their board compensation in the states in which they reside or perform services will need to navigate the often complex state tax crediting rules to determine whether they will be eligible to take a credit for the taxes that will be imposed under the new law. Depending on local laws, directors who are resident in non-U.S. jurisdictions may face even greater difficulty in alleviating any double taxation on their director fees, given that tax treaties rarely provide for crediting of state taxes.

On a positive note, the proposed regulation does not contemplate imposing withholding obligations on the director compensation by the company, although we expect that the compensation will be subject to Form 1099 reporting for California state income tax purposes (or Form 1042-S, as applicable).

Interested parties wishing to provide input on the proposed regulation at a live meeting to be held on October 8th must RSVP by October 1st.  Written comments may also be provided by November 5th, 2020.


Victor Flores is a partner in Baker McKenzie’s Employment & Compensation Practice, with a focus on Executive Compensation and Employee Benefits. Victor advises global US and non-US companies – both public and private – on all aspects of executive compensation and benefits matters, including the corporate, securities and tax law, and ERISA issues arising in the implementation and administration of compensation programs. He regularly helps clients with the design and implementation of equity and non-equity based incentive compensation programs and nonqualified deferred compensation programs. Victor also has extensive experience advising on compensations and benefits issues in mergers and acquisitions, corporate reorganizations, private equity and other corporate transactions.


Sinead Kelly is a partner in Baker McKenzie’s Compensation practice in San Francisco. She advises on U.S. executive compensation and global equity and has practiced in the compensation field since 2005. In her practice, Sinead counsels U.S. and non-U.S. public and private companies on all aspects of equity and executive compensation plans and arrangements, including plan design, drafting, administration and governance. In this regard, Sinead advises on and assists companies with compliance with U.S. federal and state securities and tax laws relating to compensation arrangements, as well as with preparing SEC disclosures, complying with stock exchange rules and addressing non-U.S. tax and regulatory requirements. She has been repeatedly recognized by Legal 500 as a leading lawyer for Executive Compensation and Employee Benefits.