Act 1982 of the 2005 Regular Session amended Arkansas law by providing for the withholding of income tax by pass-through entities on non-resident taxpayers.  This act became effective for tax years beginning on or after January 1, 2006.  In December 2006, Rule 2006-3, Income Tax Rule Withholding of Nonresident Members of Pass-through entities was promulgated by the Department of Finance and Administration.  The public hearing was held on January 3, 2007.  This rule was necessary to properly administer the withholding provisions of Act 1982 which are codified at Ark. Code Ann §26-51-616(e).  This proposed rule can be found online on the DFA webpage:

http://www.arkansas.gov/dfa/rules/dfa_revenuerules.html.

A pass-through entity that makes a distribution to a non-resident member is required to deduct and withhold Arkansas income tax from distributions of taxable income being made with respect to Arkansas source income.  The entity will remit withholding tax for the member on form AR941PT, and the member is not required to file an Arkansas individual income tax return.  If the entity withholds on the distributions, the entity must register with the Withholding Section, using form AR4ER, even if the entity is already registered for income tax withholding to remit payroll tax withholding. 

• Elect to be included in the entity's composite return; or

• File an Arkansas nonresident individual tax return.

The entity will have additional filing requirements to report to the Department of Finance and Administration listing the members that filed the AR4PT with the entity.

The chart on page 5 summarizes the filing requirements for pass-through entities and members.