CCA 200942051: Foreign subsidiary bears FICA obligation under section 3121(z)

Plain-English summary

This Chief Counsel Advice addresses FICA taxes for a foreign subsidiary that employs U.S. citizen or resident workers. Counsel states that IRC § 3121(z) treats the foreign subsidiary as an American employer, so the subsidiary, rather than the U.S. parent, bears the obligation to pay FICA. The advice notes that section 3121(z) does not address whether the foreign subsidiary may deduct FICA taxes paid on those wages. It also suggests that a controlled group concerned about future deductions could enter into a section 3121(l) agreement.

Ruling snapshot

• Question: Which entity bears the FICA obligation when a foreign subsidiary employs U.S. citizen or resident workers?
• Outcome: Advice given
• Key authorities: IRC §§ 3121(z) and 3121(l)

Full text (IRS public release)

ID: CCA-722161-08 Number: 200942051
Release Date: 10/16/2009
Office: -------------
UILC: 3121.02-00

From: --------------------
Sent: Tuesday, July 22, 2008 4:19 PM
To: ------------------------------------
Cc:
Subject: RE: -----

3121(z) would operate to treat the foreign sub as an American employer. Hence, the obligation to pay FICA rests with the foreign sub, not the US parent. 3121(z) doesn't say anything about precluding the foreign sub from deducting the FICA tax that it pays on wages paid to its US citizen or resident employees. This may be a stupid point to make because the foreign sub is not a US entity, and presumably doesn't have US income, so I'm not sure how that would work, but I assume that these controlled groups of corporations file consolidated income tax returns?

Also, if -------is concerned about not being able to get a deduction going forward, they could get around that by entering into a 3121(l) agreement.