IRS issues proposed regulations regarding withholding on retirement payments made outside U.S.

The IRS recently issued proposed regulations under IRC Section 3405 regarding income tax withholding on U.S. citizens’ retirement payments that are sent to locations outside of the U.S. Once finalized, the regulations will replace the existing guidance under IRS Notice 87-7. The proposed regulations are in the form of questions and answers.

IRS Notice 87-7 has provided the requirements for withholding on retirement payments for U.S. citizens made from employer-deferred compensation plans, IRAs, and commercial annuities that are requested to be sent to locations outside of the U.S. Much of the proposal mirrors Notice 87-7; however, there are certain changes as well as expansions intended to address open issues under the Notice. Until the regulations are finalized, Notice 87-7 continues to be applicable. The proposed regulations do not apply to the 20% withholding applicable to certain eligible rollover distributions.

Determining withholding requirement

• An Army Post Office (APO), Fleet Post Office (FPO), or Diplomatic Post Office (DPO) address will be considered to be an address within the U.S. for these purposes.
• If the payee’s residence address provided to the payer is located within the U.S., the payer must withhold unless the payee has made a valid election of no withholding. However, even where a U.S. residence address is provided, any election of no withholding is not valid if the payee directs that the payment is to be sent to a financial institution or other person located outside of the U.S., or to a financial institution or other person located within the U.S. but with instructions that the financial institution or person is to then forward the funds to a financial institution or other person located outside of the U.S.
• If the payee’s residence address provided to the payer is located outside of the U.S., the payer must withhold without regard to any delivery instructions (e.g., to deliver the payment to a financial institution or other person located within the U.S.) or the payee’s purported election of no withholding.
• If the payee does not provide the payer with a residence address, the payer must withhold without regard to the payee’s purported election of no withholding. For this purpose, a payee who provides the payer with an address for the payee’s nominee, trustee, or agent – without also providing the payee’s residence address – is treated as not having provided a residence address.
• These rules do not apply to payments to nonresident aliens or other foreign persons.

The proposed regulations largely continue the existing requirements under Notice 87-7.  However, Notice 87-7 does not address the scenario where the payee provides a U.S. residence address, but includes instructions to deliver the payment to a location outside of the U.S. The proposed regulations specifically require withholding under these circumstances. Also new and noteworthy is that the use of an APO, FPO, or DPO as the address of residence is to be considered an address within the U.S. for these purposes.

James Wall, Principal, International Tax Services
646.254.7460

Dana Fried, Managing Director, National Tax Services
516.417.5064

Gary Lubowiecki, Director, International Tax Services
973.364.7823