Tax Type
Withholding Taxes
Description
Pass-through Entity Withholding Tax
Topic
Withholding of Tax
Date Issued
02-04-2009
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 *****.
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- Sincerely,
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- Janie E. Bowen
Tax Commissioner
- Janie E. Bowen
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Rulings of the Tax Commissioner