On May 31, the IRS issued a proposed regulation — presented in Q & A format — concerning income tax withholding obligations on non-rollover distributions from employer-sponsored plans — including pension, annuity, profit sharing, stock bonus and any other deferred compensation plan — to destinations outside the U.S. Unlike U.S. payees, non-U.S. payees cannot elect to forego income tax withholding on such distributions.
Notice 87-7 provides current guidance concerning withholding obligations on non-rollover distributions. The Notice provides:
• If the payee provides the payor with a residential address outside the U.S., the payor is required to withhold.
• If the payee provides the payor with a residential address within the U.S., the payor is required to withhold unless the payee has elected no withholding.
• If the payee does not provide any residential address, the payor is required to withhold.
The proposed regulation is based on, and provides clarification concerning, the guidance provided in Notice 87-7. The proposed regulation provides:
• Withholding obligations apply and cannot be waived where the payee provides a U.S. residential address but provides payment instructions indicating the funds are to be delivered outside of the U.S.
• Withholding obligations apply and cannot be waived where the payee provides a non-U.S. residential address, without regard to the delivery instructions — including an instruction to deliver the distribution to a financial institution located in the U.S.
This clarification is an acknowledgement of the ease with which funds deposited in a U.S. financial institution can be withdrawn by a person located outside the U.S. and of the fact that a payee’s residential address is most likely the location of ultimate distribution.
• Withholding obligations apply and cannot be waived where the payee has not provided a residential address.
• Withholding obligations apply and can be waived where the payee provides a military or diplomatic post office address.
Proposed Applicability Date
The new withholding rules will apply to distributions that occur after the proposed regulation is finalized, at which point it will supersede Notice 87-7. Until then, payors can continue to rely on Notice 87-7 as well as the proposed regulation’s rule concerning military and diplomatic post office addresses.