CCA 200930037: U.S. parent generally liable for employment taxes on earlier wages of foreign disregarded entity

Plain-English summary

This Chief Counsel Advice addresses employment taxes on wages paid to employees of a foreign entity treated as disregarded from its U.S. parent for earlier years. It states that the IRS could assert that the U.S. parent was liable for FICA and FUTA on those wages because the employees were treated as working for an American employer. The advice says the wages would generally not be subject to income tax withholding if they were reasonably expected to qualify for the section 911 exclusion or were subject to withholding under foreign law. It also states that new regulations made the foreign entity no longer disregarded for employment-tax purposes for 2009 and later years, so the parent would no longer be liable for those wages.

Ruling snapshot

• Question: Who is responsible for employment taxes on wages paid by a foreign disregarded entity for the years before new regulations applied?
• Outcome: Advice given.
• Key authorities: IRC § 911; FICA and FUTA employment-tax rules

Full text (IRS public release)

ID: CCA_2009061616105732 Number: 200930037
Release Date: 7/24/2009
Office: -------------
UILC: 7701.01-01

From: --------------------
Sent: Tuesday, June 16, 2009 4:11:01 PM
To: --------------------
Cc: ------------------
Subject: RE: Check the Box

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For the years --------and -------, I can't see any reason why the IRS would not assert that the US parent is liable for employment taxes attributable to wages paid to employees of the foreign disregarded entity. The entity is disregarded as separate from its owner for all federal tax purposes for those years. Thus, it is as if the employees are working for an American employer. Generally, wages paid to US citizens working outside the United States for American employers are subject to FICA and FUTA. The wages won't be subject to income tax withholding if it is reasonable to believe at time of payment that they will be excludable from the recipient's gross income under section 911, or if they are subject to income tax withholding under the laws of a foreign country. I contacted -------------at one point to confirm that they support this view that the US parent is liable for employment taxes on wages paid by a foreign disregarded entity, and they agreed. Of course, for 2009 and forward, the foreign entity is no longer disregarded for employment tax purposes under the new regs, so the US parent would no longer be liable for employment taxes on wages paid to employees of the foreign entity. Hope this is helpful.

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