CFC Restricted Stock Units Are Subject to Income Tax Withholding

CFC Restricted Stock Units Are Subject to Income Tax Withholding

Internal Revenue Service

In a legal memorandum, the IRS concluded that restricted stock units compensating an employee for work performed for both a U.S. employer and its controlled foreign corporation are wages subject to federal income tax withholding but only grants for work performed in the United States will be subject to FICA. The IRS also determined that the employer should use a reasonable method and the principles of <a href="/research/federal/usc26/861" resolve="/lr/resolve/section-861/cpbz" title="section 861">section 861</a> and <a href="/research/federal/usc26/862" resolve="/lr/resolve/section-862/cnpx" title="section 862">862</a> to allocate the employees' services between domestic and foreign work for determining how much of the restricted stock unit income is subject to FICA. The number of days working in each location would be one permissible method, but alternatives are available, and a Social Security totalization agreement could affect the outcome, the IRS said. The parent corporation is a U.S. company with many foreign affiliate CFCs that grants restricted stock units to its common law employees. The parent and CFCs are treated as separate taxpayers. Although employees could transfer from the parent to a CFC between grant and vesting of the restricted stock units, it was stipulated that all work for the U.S. parent was done domestically and all work for CFCs was performed outside the United States. The IRS found that the restricted stock units satisfied the definitions of wages under both the income tax withholding regime of <a href="/research/federal/usc26/3401" resolve="/lr/resolve/section-3401/cnwj" title="section 3401">section 3401</a> and the FICA contribution rules of <a href="/research/federal/usc26/3121" resolve="/lr/resolve/section-3121/cp06" title="section 3121">section 3121</a>. The one exception applicable in this situation was the FICA exclusion for work performed outside the United States for a non-U.S. employer (the CFCs). Thus, the <a href="/research/federal/usc26/861" resolve="/lr/resolve/section-861/cpbz" title="section 861">section 861</a> sourcing rules are only necessary for determining which restricted stock unit grants are subject to FICA, according to the IRS, and they should look at the period between grant and vesting. The effect of a totalization agreement, and possible double taxation concerns, will turn on the specific terms of the relevant agreement, but without such an agreement, the U.S.-based portion of the restricted stock units will be subject to FICA, the agency said.

In a legal memorandum, the IRS concluded that restricted stock units compensating an employee for work performed for both a U.S. employer and its controlled foreign corporation are wages subject to federal income tax withholding but only grants for work performed in the United States will be subject to FICA.

In a legal memorandum, the IRS concluded that restricted stock units compensating an employee for work performed for both a U.S. employer and its controlled foreign corporation are wages subject to federal income tax withholding but only grants for work performed in the United States will be subject to FICA. The IRS also determined that the employer should use a reasonable method and the principles of section 861 and 862 to allocate the employees' services between domestic and foreign work for determining how much of the restricted stock unit income is subject to FICA. The number of days working in each location would be one permissible method, but alternatives are available, and a Social Security totalization agreement could affect the outcome, the IRS said. The parent corporation is a U.S. company with many foreign affiliate CFCs that grants restricted stock units to its common law employees. The parent and CFCs are treated as separate taxpayers. Although employees could transfer from the parent to a CFC between grant and vesting of the restricted stock units, it was stipulated that all work for the U.S. parent was done domestically and all work for CFCs was performed outside the United States. The IRS found that the restricted stock units satisfied the definitions of wages under both the income tax withholding regime of section 3401 and the FICA contribution rules of section 3121. The one exception applicable in this situation was the FICA exclusion for work performed outside the United States for a non-U.S. employer (the CFCs). Thus, the section 861 sourcing rules are only necessary for determining which restricted stock unit grants are subject to FICA, according to the IRS, and they should look at the period between grant and vesting. The effect of a totalization agreement, and possible double taxation concerns, will turn on the specific terms of the relevant agreement, but without such an agreement, the U.S.-based portion of the restricted stock units will be subject to FICA, the agency said.

Sec. 861 Income from sources within the United States

Sec. 862 Income from sources without the United States

Search Connectors

Proximity Search:

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

CFC Restricted Stock Units Are Subject to Income Tax Withholding