Does 30 percent withholding apply to a board director from India receiving a stock distribution? Per agreement, he resigned and six months after resignation, he is to receive the stock distribution.


A. We spoke with IRS international information agent Joseph Smith (#1000212740), who said if this is a capital gains distribution to an individual residing in India who is not a U.S. citizen, this is not considered U.S. trade or business under code 871(d), and is therefore not taxable.

However, if this understanding of the situation is incorrect, and this distribution is part of compensation to the individual as a director, please let us know and we'll revisit.

Q. This distribution is part of compensation to the individual as a director, it’s just distributed to him six months after his resignation. The stock was earned while he was on the board of directors.

A. We were finally able to reconnect with Mr. Smith at the IRS today. According to Mr. Smith, if you have an in-force Form W8-BEN from the former director, then the stock distribution is not considered to be effectively connected to a U.S. trade or business, and you do not have to withhold. If you don't have a W8-BEN, you will need to withhold and the director will have to file a return to receive a refund.

He mentioned nothing about the NRA withholding tax being in any way dependent on whether the stock distribution was issued in the year of his resignation or the year following, and this does not appear to be relevant as to whether or not you withhold. The key here apparently is having the W8-BEN form.

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