Foreign Subsidiaries of U.S. Companies May Be Liable for FICA Taxes


On June 17, 2008, the Heroes Earnings Assistance and Relief Tax Act of 2008 (“HEART”) was signed into law. HEART, which generally extends various tax relief measures to members and veterans of the U.S. armed forces, amends Section 3121 of the Internal Revenue Code of 1986 (the “Code”) to extend liability under the Federal Insurance Contributions Act (“FICA”) to certain foreign employers.

Prior to the enactment of HEART, FICA taxes only applied to wages earned by U.S. citizens and residents rendering services abroad if paid by an “American Employer” – i.e., a domestic corporation or certain U.S.-owned non-corporate entities. New Section 3121(z) of the Code treats foreign employers as American Employers for purposes of applying FICA to wages paid to U.S. citizens and residents for performing services in connection with a contract between the U.S. government and a member of a domestically controlled group of entities to which the foreign employer belongs.

For purposes of determining whether a foreign employer belongs to a domestically controlled group of entities, HEART modifies the Code’s 80 percent ownership threshold generally required for determining the existence of a controlled group. Under Section 3121(z), a group of entities will constitute a controlled group where more than 50 percent of the voting power or value of all classes of corporate stock, or more than 50 percent of the beneficial interest of a non-corporate entity, is owned by one or more of the other entities within the group.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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