Withholding on Distributions to Nonresident Aliens

[chris]

A U. S. corporation has a number of employees who are nonresident aliens from Mexico. Must the employer withhold the mandatory 20% on "eligible rollover distributions" made to these employees? Article 19 of the tax treaty between Mexico and the U.S. (which can be found at 1994-2 C.B. 489 or 1994-34 I.R.B. 1)seems to say that such payments are exempt from U.S. tax, i.e., no withholding. Does anyone have any comments or suggestions?? Thanks in advance...

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[Guest ak]

Generally, it appears that 20% withholding may not be required on the portion of the distribution that is subject to Sec. 3405©. Basically, this would be true if the treaty came into being after the date the mandatory withholding provision took effect. If this is not the case, then the 20% rule would apply on the "effectively connected" portion of the distribution that is eligible for rollover. Under new rules published by the IRS, this problem will eventually go away. They provide that payments to a nonresident alien from a qualified plan, etc. will be subject to Sec. 1441 withholding instead of Sec. 3405 withholding. These new rules generally take effect with distributions made after 12/31/2000.

[chris]

ak,

The mandatory 20% withholding came into effect with UCA '92. The treaty was signed 1994. Just as a note, I called the IRS -- Employee Plans branch and they directed me to Notice 87-7 (which says no withholding if payee certifies residence is outside of U.S.). They were clueless about the 1994 Treaty (even though result is the same). How will Sec. 1441 change this?

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[Guest ak]

Basically, all the 1441 rules will do in this case is make it clear that withholding will be under that section (i.e., 20% rule will apply). But withholding under 1441 may not be necessary if the provisions of a tax treaty take precedence and the distributee elects to be covered by the treaty provisions.

[Guest ak]

Oops! In my last post, the phrase in the parentheses should have said the "20% rule will NOT apply". Sorry.

[Guest ak]

Oops! In my last post, the phrase in the parentheses should have said the "20% rule will NOT apply". Sorry.