Another NRA Withholding Q

[Guest lvegas]

How is the following reconciled?

1. IRS Pub. 515 (Jan 2005) states on p. 19 in describing the rules for withholding on pension payments to foreign payees that graduated withholding may be used with regard to the portion of the payments attributable to the performance of services in the US after 1986 if you get a Form W-8ECI, the idea being that such amounts are effectively connected income (ECI) and not subject to the statutory 30 % withholding rate under 1441.

2. BUT, Treas. Reg. 1.1441-4(b)(1)(ii) (effective as Jan. 2001 I think) specifically says that the general exception from 1441 for payments otherwise constituting ECI is not applicable to any payments to a nonresident alien from a tax-qualified plan -- in other words, the 1441 regs seemingly overide what is stated in pup 515.

Can anyone shed light?

[Guest TAG]

Lvegas,

Basically, NRA withholding from qualified plans require 3 things to start.

1) Is this a US or Foreign Person?

a) US person requires IRS Form W-9

b) Foreign person requires Form W8-BEN

Lack of Form (need original, not fax) and presumed to be foreign person.

2) Is this a lump sum or installment payment (doesn't always matter depending on country)

3) What country are the monies going to (good or bad country)

Answer the 3 questions above and I will try and help you with your distribution. At best, NRA distributions from qualified plans can be complex if you wish to reduce the federal withholding below 30%....legally.

TAG

[Guest lvegas]

Lvegas,

Basically, NRA withholding from qualified plans require 3 things to start.

1) Is this a US or Foreign Person?

a) US person requires IRS Form W-9

b) Foreign person requires Form W8-BEN

Lack of Form (need original, not fax) and presumed to be foreign person.

Foreign

2) Is this a lump sum or installment payment (doesn't always matter depending on country)

Installment

3) What country are the monies going to (good or bad country)

Canada

Answer the 3 questions above and I will try and help you with your distribution. At best, NRA distributions from qualified plans can be complex if you wish to reduce the federal withholding below 30%....legally.

TAG

Ultimately my question goes to the issue of why the Publication says you can use graduated withholding in certain circumstances when the regs say the 1441 rules always apply now.

[Guest TAG]

LVegas,

Canadian resident with installment payments can be reduced only to 15% Federal withholding. Mandatory that participant fills out W8-BEN completely and sends to you in order to get the 15% treaty rate. No form, then must withhold at 30%. This is assuming no foreign source monies in plan.

Annual reporting must be done on 1042-S as well, withholding submissions to proper 1042 account @Fed.

Hope this helps.

TAG

[Guest lvegas]

The answer is different if it's a lump sum, isn't it? I recall that the US-Can treaty only provides a reduced rate for periodic retirement income so it would be a 30% rate. I think there's an IRS Info letter out on this.

[Guest TAG]

LVegas,

That is correct. No sense in requesting IRS forms in that situation.

TAG