Distributions to foreign citizens

[Guest PeterGulia]

A distribution to a non-resident alien is subject to 30 percent withholding unless the withholding agent has documents by which the participant certifies each portion of the distribution entitled to a different treatment.

The participant may certify each portion of the distribution that is

· effectively connected with a US trade or business

· foreign source income

· exempt under a treaty.

A participant uses IRS Form W-8 to certify her exemption from the 30 percent withholding tax.

A distribution to a non-resident alien may be comprised of up to three different kinds of income. A different withholding rule applies to each kind of income.

1) The portion of a distribution allocable to contributions for services performed in the US is subject to tax as income effectively connected with the conduct of a US trade or business ["ECI"]. Generally, ECI is subject to the regular pension withholding rules. However, periodic payment distributions that are effectively connected may be subject to either the normal pension withholding rules or the special 30 percent withholding.

2) The portion of a distribution allocable to contributions for services performed outside the US is not subject to US tax because it is not income derived from US sources. Also, such income is exempt from withholding.

3) The investment earnings portion of a distribution is US source income that is not effectively connected with the conduct of a US trade or business. The portion of a distribution to a non-resident alien that is US source income and not ECI is subject to 30 percent withholding rather than pension withholding.

A non-resident alien makes her withholding certificate on IRS Form W-8. Generally, this certificate is valid only for three years.

A non-resident alien must obtain an IRS taxpayer identifying number if she claims an exclusion for pension income or her withholding certificate claims the benefit of a treaty. Because for most citizens the Social Security Number is the taxpayer identifying number, the IRS has a procedure for issuing an individual taxpayer identifying number to an alien or other individual who is not entitled to Social Security benefits.

Don't do anything special unless you get the completed Form W-8 with a valid ITIN.

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[Guest eep]

We have an participant who terminated from the 401(k) Plan. He will be taking a lump sum distribution. The individual is a residient of the UK and is a citizen of France. As the withholding agent, we are trying to figure out what our obligation is. The U.S. and England have Treaty with the UK that states that there is zero withholding required for tax purposes. Does anyone know if we withhold zero or are we at least obligated to withhold 20% mandatory withholding (as opposed to the typical 30% withholding on foreign payments)? Any guidance would be appreciated. Thank you.

[Guest]

You need to read the U.S. - U.K. treaty carefully. Just because the employee is a citizen of the U.K. doesn't mean that the U.K. treaty applies. Since he is now a resident of France, the U.S. - France treaty may be applicable. It is even possible that no tax treaty applies to him. You must read the treaties. Failure to withhold is painful since you can guess the odds in favor of the IRS ever getting the tax from an individual residing in Europe. The IRS will come after you . . .