[Code of Federal Regulations]
[Title 26, Volume 15]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR36.3121(l)(1)-3]

[Page 448-449]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 36_CONTRACT COVERAGE OF EMPLOYEES OF FOREIGN SUBSIDIARIES--Table of Contents
 
Sec. 36.3121(l)(1)-3  Effect of agreement.

    (a) Liability for amounts equivalent to tax--(1) In general. A 
domestic corporation which has entered into an agreement (as provided in 
Sec. 36.3121(l)(1)-1, or any amendment thereof (as provided in Sec. 
36.3121(l)(1)-2, incurs liability under the agreement in respect of 
certain remuneration paid by each foreign subsidiary named in the 
agreement, or any amendment thereof. Liability is incurred in respect of 
the remuneration paid to all those employees of the foreign subsidiaries 
who are citizens of the United States and who perform services outside 
the United States (other than services which constitute employment) for 
the foreign subsidiaries. However, liability is incurred only with 
respect to that portion of such remuneration paid by the foreign 
subsidiary which is attributable to services performed during the period 
for which the agreement is in effect with respect to such subsidiary, 
and then only to the extent that the remuneration would constitute wages 
if the services to which the remuneration is attributable were performed 
in the United States. Liability with respect to such remuneration is 
incurred in an amount equivalent to the sum of the employee and employer 
taxes which would be imposed by sections 3101 and 3111, respectively, if 
such remuneration constituted wages. If an individual performs services 
for more than one of the foreign subsidiaries named in an agreement, 
including any amendment thereof, such services are regarded as being 
performed in the employ of a single employer for purposes of determining 
the amount of the remuneration for such services which would constitute 
wages if the services were performed in the United States. See Sec. 
36.3121(l)(9)-1, relating to the treatment of a domestic corporation as 
a separate entity in its capacity as a party to an agreement.
    (2) Examples. The application of paragraph (a)(1) of this section 
may be illustrated by the following examples:

    Example 1. P. a domestic corporation, has entered into an agreement 
as provided in Sec. 36.3121(l)(1)-1, effective with respect to services 
performed on and after January 1, 1955. Three foreign subsidiaries, S-1, 
S-2, and S-3 are named in the agreement. A, a citizen of the United 
States, is employed during 1955 by S-1, S-2, and S-3, for the 
performance outside the United States of services covered by the 
agreement. In 1955 A is paid remuneration of $2,500 for such services by 
each of the foreign subsidiaries. The circumstances are such that the 
entire $7,500 would constitute wages if the services has been performed 
in the United States. However, only $4,200 of such remuneration would 
constitute wages if the services had been performed in the United States 
for a single employer, and it is with respect to this amount only that P 
incurs liability under its agreement.
    Example 2. On August 1, 1955, P, the domestic corporation in the 
preceding example, amends its agreement to include therein its foreign 
subsidiary S-4. The amendment is in effect with respect to S-4 for the 
period beginning with October 1, 1955. B, a citizen of the United 
States, is employed by S-4 throughout 1955 for the performance of 
services outside the United States. B is paid remuneration of $500 in 
each month of 1955 for these services. The circumstances are such that 
the first $4,200 of such remuneration would constitute wages if the 
services had been performed in the United States, and, except for the 
$4,200 limitation, the remainder of such remuneration would constitute 
wages if the services had been so performed. P incurs no liability with 
respect to remuneration paid B for services performed for S-4 prior to 
October 1, 1955. However, P incurs liability under its agreement with 
respect to the $1,500 paid B in October, November, and December 1955, 
for services performed in these months. Since the remuneration paid to B 
for services performed during the first nine months of 1955 is not 
covered by the agreement, such remuneration is not taken into account in 
computing the $4,200 limitation or the liability under the agreement.
    Example 3. Assume the same facts as in example 2 except that B's 
services for S-4 during December 1955 are of a character which if 
performed within the United States would be excepted from employment. 
Accordingly, P incurs no liability under the agreement with respect to 
the $500.00 paid in December 1955 for such services.

    (3) Determination of liability. The amount of the liability referred 
to in paragraph (a)(1) of this section incurred by a domestic 
corporation for any period shall be determined in the same manner as 
liability for the employee tax and for the employer tax imposed by the 
Federal Insurance Contributions Act is determined, pursuant to 
regulations relating to the taxes under such act as in effect for the 
same period, with respect to wages paid by an employer to an employee.

[[Page 449]]

    (b) Liability for amounts equivalent to interest or penalties. A 
domestic corporation which has entered into an agreement as provided in 
Sec. 36.3121(l)(1)-1 also incurs liability under the agreement for 
amounts equivalent to the amount of interest, additions to the taxes, 
additional amounts, and penalties which would be applicable if the 
remuneration for services covered by the agreement constituted wages.
    (c) Deductions from employees' remuneration. There is no obligation 
to deduct, or cause to be deducted, from the remuneration of any 
employee of a foreign subsidiary any part of the amount due from a 
domestic corporation under its agreement. Whether such deduction shall 
be made is a matter for settlement between the employee and the domestic 
corporation or such other person as may be concerned.
    (d) Cross reference. For other obligations of a domestic corporation 
under an agreement, see Sec. 36.3121(l)(1)-1.

[T.D. 6145, 20 FR 6577, Sept. 8, 1955, as amended by T.D. 6390, 24 FR 
4831, June 13, 1959]