Did Virginia pass-through withholding apply to a disregarded single-member LLC or to Virginia-source income allocated to a U.S. Virgin Islands resident?

Subject

Disregarded LLC and qualifying USVI owner were exempt from PTE withholding

Plain-English summary

Virginia said a federally disregarded single-member LLC did not owe the pass-through entity withholding tax. Because Virginia followed the federal disregarded treatment for income tax, the LLC itself was not treated as a separate pass-through entity required to pay the withholding.

Virginia also exempted the described nonresident owner who qualified as a U.S. Virgin Islands resident. A compliant USVI resident reported income from all sources to the territory, and IRC § 932(c)(4) excluded that reported income from U.S. federal gross income. Because the Virginia-source income was exempt from federal income tax by reason of the owner's status and reporting, it met the cited Virginia withholding exemption.

The ruling expressly assumed that the individual satisfied the requirements for USVI residence.

What this means for you

• Confirm federal entity classification before applying PTE withholding.
• A disregarded LLC was not a separate withholding payer under the guidance cited here.
• Owner exemptions require evidence of residence, federal treatment, territorial reporting, and Virginia-source income.
• This ruling describes a then-new 2009 regime; verify current Virginia PTE tax and withholding rules.

Common questions

Did a disregarded single-member LLC withhold?

No, under the guidance applied in the ruling.

Why was the USVI resident exempt?

The income was reported to and taxed by the USVI and excluded from U.S. federal income tax under IRC § 932(c)(4).

Did Virginia decide whether the owner truly was a USVI resident?

No. The ruling assumed that requirement was met.

Citations and references

• Va. Code § 58.1-486.2(C)(1).
• IRC § 932(c)(4).
• P.D. 07-150, Guidelines for Pass-Through Entity Withholding.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 09-20

Original ruling text

February 4, 2009

Re: Ruling Request: Pass-through Entity Withholding Tax

Dear *:

This is in response to your letter in which you requested a ruling regarding the new pass-through entity ("PTE") withholding tax.

First, you inquire as to whether a single member limited liability company, which is a disregarded entity, would be subject to the withholding requirements.

In the Guidelines for Pass-Through Entity Withholding (Public Document 07-150, 9/21/07), the Department of Taxation ("TAX") stated that, "If a pass-through entity is disregarded for federal purposes, it is also disregarded for purposes of the Virginia income tax. As a result, the disregarded entity is not required to pay this withholding tax." Therefore, a single member limited liability company, which is a disregarded entity, would not be subject to the new withholding requirements.

Your second question involves a client who does receive income from Virginia sources, but who is a resident of the United States Virgin Islands ("USVI"). Instead of paying federal income taxes, the taxpayer is required to file an income tax return and report all of his income to the USVI. You ask if this taxpayer will be exempt from the new Virginia withholding requirement. For the purposes of this ruling, we will assume that the taxpayer meets the requirements to be a resident of the USVI.

Under Va. Code § 58.1-486.2 C 1, withholding is not required for a nonresident owner, other than a nonresident corporation, "who is exempt from the tax imposed by this article. An owner shall be exempt from the tax imposed by this article only if the owner is, by reason of the owner's purpose or activities, exempt from paying federal income taxes on the owner's Virginia source income." In the Guidelines, TAX provided some examples of owners who would be exempt under this provision. These examples included individuals who were granted diplomatic immunity and individuals who did not have any liability for Virginia income tax in the previous year and who did not expect to have any liability in the current year.

Individuals who are residents of the USVI do not pay income taxes to the United States federal government. Instead, they are required to file an income tax return with and pay income tax to the USVI. The individual is required to report income from all sources and identify the source of each item of income on the return. Under Internal Revenue Code § 932 c 4, in the case of residents of the USVI who comply with these requirements, "for purposes of calculating income tax liability to the United States, gross income shall not include any amount included in gross income on such return, and allocable deductions and credits shall not be taken into account."

Due to these limitations, residents of the USVI are not required to pay federal income tax on their Virginia source income. That income is instead reported to the USVI and the applicable tax is paid to that territory. Because the Virginia source income is exempt from the federal income tax, the nonresident owner who is a resident of the USVI will not be subject to the new Virginia withholding requirement.

I trust that this reply answers your ruling request. The Code of Virginia sections cited and other reference documents are available on-line in the Tax Policy Library section of the TAX's web site located at www.tax.virginia.gov. If you should have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Policy Development, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner