California revises proposed withholding rules, asks for comments

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April 2019

Overview

The California Franchise Tax Board’s (FTB) proposed Domestic Pass-Through Entity Withholding Regulation (Regulation), California Code of Regulations (CCR) Sec. 18622-7, has been further revised based on comments received from the second interested parties meeting (IPM) held on September 8, 2017. In lieu of an additional IPM, the FTB is requesting any written comments regarding the revised regulation by 5:00pm on June 17, 2019

The significant revisions to the proposed Regulation following the last IPM include:

  • Self-Certification - Safe harbor provision added when Form 592-B, Resident and Nonresident Withholding Tax Statement, is received late from lower-tier pass-through entity
  • 10 Day Notification Requirement eliminated for withholding payments.

Following the close of the comment period and incorporation of any comments, the FTB intends to proceed with the formal approval of the Regulation.

The takeaway

The proposed Regulation changes California withholding rules for PTEs and their owners, including a new method of calculating withholding tax based on the nonresident owner’s distributive share of California source income, and applying tax rates at the highest marginal rate based on each owner’s entity type.

The recent revisions to the Regulation address some previously communicated concerns by adding a safe harbor for late filing of Form 592-PTE and eliminating the 10-day notification requirement. While the safe harbor is a welcome relief over the 10-day notification period, the reporting will remain a challenge for certain taxpayers, certainly in the fund-to-fund context, as it can be uncertain as to when the last Form 592-B will be received.

Interested parties should submit any additional comments to the FTB by June 17, 2019 before the Regulation is submitted for formal approval.

Contact us

Caragh DeLuca

Partner, PwC US

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