Cross-Border Split-Dollar Issues: Residency, Withholding, and Treaty Considerations

High-net-worth (HNW) families and business owners increasingly use split-dollar life insurance in cross-border contexts to preserve wealth, fund buy-sell agreements, and reward executives. When one or more parties to a split-dollar arrangement are non‑U.S. residents or the policy is on a foreign‑resident insured, residency, withholding, and tax-treaty rules materially change the tax, reporting, and compliance profile. This article focuses on U.S. market implications (New York, California, Florida, Texas) and practical planning considerations for commercial advisors structuring cross‑border split‑dollar arrangements.

Why residency matters: income tax and estate tax consequences

Residency determines whether U.S. tax law applies to compensation and whether U.S. estate tax can reach life insurance proceeds.

• U.S. citizens and resident aliens (green card holders or substantial presence test) are subject to U.S. income and estate tax on worldwide items.
• Nonresident aliens (NRAs) are generally taxed by the U.S. only on U.S.-source income and U.S.-situs assets for estate tax purposes. See IRS Publication 519 for residency and sourcing rules.
  Source: https://www.irs.gov/publications/p519

Key estate-tax point for NRAs:

• For NRAs, U.S.-situs assets (including U.S.-issued life insurance if the decedent owned the policy and the policy is considered U.S. situs under facts and applicable law) are subject to U.S. estate tax. The NRAs’ unified estate tax exemption is only $60,000 (much lower than the U.S. resident exemption), so even modest U.S.-situs policy values can create large U.S. estate tax exposure.
  Source: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax-for-nonresident-aliens

Table — High-level residency comparison

*Check current unified exemption for given tax year.

Withholding and payroll: how split‑dollar creates wage sourcing issues

Split‑dollar arrangements that provide an economic benefit to an employee or executive often generate imputed compensation under U.S. tax rules. That imputed amount:

• Is included in employee gross income and subject to payroll withholding (income tax withholding under IRC §3402).
• May be subject to Social Security and Medicare (FICA) and FUTA, depending on whether the employer is the plan sponsor and where services are performed.
• For NRAs, the sourcing of the compensation (where services are performed) drives withholding obligations. IRS Publication 515 details withholding rules for nonresident aliens and foreign entities.
  Source: https://www.irs.gov/publications/p515

Practical cross‑border examples:

• A nonresident executive performing services in New York: compensation stemming from services performed in the U.S. is U.S.-source and generally subject to U.S. withholding and employment taxes regardless of personal residence.
• An employee working abroad for a U.S. company: if the services are performed outside the U.S., the imputed economic benefit may be foreign‑source and not subject to U.S. payroll withholding — but U.S. reporting and other foreign tax consequences may apply.

Compliance checklist for employers:

• Determine the proper valuation regime (economic-benefit vs loan) and compute imputed income.
• Withhold federal income tax and FICA/FUTA as applicable based on the employee’s residency and service location.
• For NRAs, apply source rules and check treaty provisions.
• File required forms (Form W-2, Form 1099, or Form 1042-S for FDAP to NRAs).

See detailed regime comparison in our analysis: Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today.

Treaty considerations: can tax treaties reduce exposure?

U.S. tax treaties can affect withholding and estate tax outcomes, but treaties vary. Key points:

• Some treaties allocate estate tax jurisdiction or offer credits/exemptions for certain property and beneficiaries. Others provide tie-breaker rules for residency and reduce withholding on certain categories of income. See the IRS list of estate tax treaties for details.
  Source: https://www.irs.gov/businesses/international-taxpayers/estate-tax-treaties
• A treaty may prevent double taxation or provide relief that reduces U.S. estate tax on a decedent’s U.S.-situs assets, but treaties rarely eliminate all exposure—they must be reviewed line-by-line.
• Treaties generally do not treat imputed economic benefits from split‑dollar as a special category — treaty articles on dependent personal services, pensions, and other income may be relevant based on facts.

Practical tip: Always confirm treaty applicability, residency under the treaty’s tie-breaker rules, and whether treaty benefits require an administrative procedure or documentation (e.g., IRS Form 8233 or certificates of residence).

Documentation, structure choice, and ERISA/compliance traps

The cross‑border stakes make documentation and structure essential:

• Choose regime: the loan regime (documented loan with interest and repayments) often simplifies withholding but may create foreign‑law loan issues and need for enforceability. The economic‑benefit regime creates imputed taxable income and clear U.S. tax consequences.
• Draft comprehensive split‑dollar agreements to address repayment, valuation, default, and cross-border enforcement. See: Drafting Split-Dollar Agreements: Protecting Interests, Valuation, and Repayment Terms.
• Employer-owned policy issues: employer-owned life insurance (EPLI) can trigger notice/reporting rules and ERISA considerations for U.S. plan participants. See: Employer-Owned Policies and Split-Dollar: Compliance, ERISA Issues, and Best Practices.
• Cross-border enforcement: choice of governing law and forum clauses, and use of qualified domestic trusts (QDOTs) for surviving nonresident spouses where treaties or domestic law require.

Costs, carriers, and typical pricing (U.S. market focus)

Selecting a carrier and estimating economics are often first-order concerns for HNW clients.

• Common carriers for HNW permanent life solutions include New York Life, Northwestern Mutual, Pacific Life, and Prudential. These companies offer universal life (UL), indexed UL (IUL), and private placement life (PPLI) solutions — product choice influences premium, crediting, and tax transparency.
• Illustrative pricing (approximate market ranges; actual quotes vary by age, underwriting class, product, and carrier):
  • $5 million UL/IUL for a healthy 55‑year‑old male (preferred nonsmoker): annual premiums may range roughly $25,000–$75,000 (carrier and product dependent).
  • Private placement life insurance (PPLI) for UHNW families often has higher up-front structuring costs but better investment flexibility; initial funding often begins at $1 million–$5 million+.
• Legal and advisory costs for cross-border split‑dollar setup: expect $5,000–$25,000+ for drafting agreements, tax memos, and cross‑border counsel; larger, multi-jurisdictional matters escalate accordingly.
• Carriers and brokerages differ on availability for NRAs — e.g., some carriers restrict issuance to U.S. residents or require collateral assignments; confirm with each carrier.

Always obtain carrier-specific illustrations and binding underwriting requirements for clients in hubs such as New York City, Los Angeles, Miami, Houston, or Dallas.

Example scenario — CEO resident of France with U.S. operations

• Facts: French resident CEO performs 75% of services in New York; employer (U.S. C‑Corp) provides split‑dollar economic‑benefit insurance; death benefit $10M.
• Implications:
  • Imputed economic benefit attributable to New York services is U.S.-source compensation and subject to U.S. withholding and payroll taxes.
  • If the CEO owns a U.S.-issued policy and dies while a French resident, the policy value may be U.S.-situs and subject to U.S. estate tax; treaty analysis required to determine relief.
  • Proper documentation, withholding deposits, and cross‑border tax advice are essential to avoid 30% FDAP withholding surprises or estate tax exposure beyond planning expectations.

Final considerations for advisors in the U.S. market

• Cross‑border split‑dollar engagements require coordinated planning among insurance brokers, U.S. and foreign tax counsel, and corporate payroll teams.
• Begin with residency and treaty analysis, then select the valuation regime and confirm carrier acceptability for the specific non‑U.S. party.
• Use meticulous agreements and keep contemporaneous payroll and withholding records to withstand IRS and foreign-tax authority scrutiny.

Internal resources:

• Economic Benefit vs Loan Regime: How the IRS Treats Split-Dollar Arrangements Today
• Employer-Owned Policies and Split-Dollar: Compliance, ERISA Issues, and Best Practices
• Drafting Split-Dollar Agreements: Protecting Interests, Valuation, and Repayment Terms

Authoritative references:

• IRS Publication 519, U.S. Tax Guide for Aliens — residency and sourcing: https://www.irs.gov/publications/p519
• IRS Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities: https://www.irs.gov/publications/p515
• IRS — Estate Tax for Nonresident Aliens: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax-for-nonresident-aliens