A partnership that has foreign partners or engages in certain transactions with foreign persons may have one (or more) of the following obligations. Withholding on foreign partner’s effectively connected taxable income (ECTI) If during a partnership's tax year the partnership has taxable income effectively connected with the conduct of a trade or business within the United States that is allocable to a foreign partner, the Internal Revenue Code requires the partnership to report and pay a withholding tax under IRC Section 1446 to the IRS. The partnership must pay the IRC section 1446 withholding tax regardless of the amount of foreign partners' ultimate U.S. tax liability and regardless of whether the partnership makes any distributions during its tax year. Revenue Procedure 92-66, and Treasury Regulation section 1.1446-3 set forth the time and manner for paying the withholding tax, as well as the general reporting obligations with respect to the tax. Refer to Form 8804, Annual Return for Partnership Withholding Tax (Section 1446), Form 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, and Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446), for further guidance on reporting and paying the IRC section 1446 withholding tax. A partnership that fails to comply with IRC section 1446 reporting and withholding requirements may be subject to penalties and interest. The partnership may reduce the foreign partner’s share of the partnership’s gross effectively connected income by certain partner level deductions and losses if the foreign partner certifies these losses on Form 8804-C, Certificate of Partner-Level Items to Reduce Section 1446 Withholding (see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for additional information). Special rules apply to publicly traded partnerships. Publicly traded partnerships (within the meaning of Rev. Proc. 89-31) must file Forms 8804, 8805, and 8813 only if they have elected to pay IRC section 1446 withholding tax based on effectively connected taxable income allocable to its foreign partners. For more information about the rules applicable to publicly traded partnerships see Revenue Procedure 92-66. Fixed, determinable, annual or periodical (FDAP) income A partnership may have to withhold tax on a foreign partner's distributive share of fixed or determinable annual or periodical gains and income (FDAP income) not effectively connected with a U.S. trade or business, as well as withhold on any other FDAP income paid to a foreign person regardless of whether he is a partner or not (NRA Withholding). Report this type of withholding on Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons and Form(s) 1042-S, Foreign Person's U.S. Source Income Subject to Withholding. Refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and to the Instructions for Form 1042-S. Withholding under the Foreign Investment in Real Property Tax Act (FIRPTA) If a partnership acquires a U.S. real property interest from a foreign person, the partnership may have to withhold tax under IRC section 1445 (FIRPTA) on the amount it pays for the property (including cash, the fair market value of other property, and any assumed liability). Withholding on foreign partner’s sale of a partnership interest A purchaser of a partnership interest, which may include the partnership itself, may have to withhold tax on the amount realized by a foreign partner on the sale for that partnership interest if the partnership is engaged in a trade or business in the United States, as per new section 1446(f) of the Internal Revenue Code that was added by section 13501 of P.L. 115-97. For withholding, payment, and reporting requirements under section 1446(f), see the Instructions for Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Notice 2018-29 (or any future published guidance). Withholding under the Foreign Account Tax Compliance Act (FATCA) A partnership may have to withhold tax on distributions to a foreign partner of a foreign partner’s distributive share when it earns withholdable payments. A partnership may also have to withhold on withholdable payments that it makes to a foreign entity. See sections 1471 through 1474 of the Internal Revenue Code. A partnership that has a duty to withhold but fails to withhold may be held liable for the tax, applicable penalties, and interest. See section 1461 of the Internal Revenue Code. Coordination of IRC Sections 1445 and 1446(a) A domestic partnership that is otherwise subject to the withholding requirements of IRC sections 1445 (FIRPTA) and 1446 (partnership withholding) will be subject to the payment and reporting requirements of IRC section 1446 only and not IRC section 1445 with respect to partnership gain from the disposition of a U.S. real property interest. A partnership that has complied with the requirements of IRC section 1446 will be deemed to satisfy the withholding requirements for FIRPTA. However, a domestic partnership that would otherwise be exempt from IRC section 1445 withholding by operation of a nonrecognition provision must continue to comply with the FIRPTA requirements (see Treasury Regulation section 1.1445-5(b)(2)). In the event that amounts are withheld under FIRPTA at the time of the disposition of a U.S. real property interest, such amounts may be credited against the partnership's 1446 tax. A partnership that fails to comply fully with the requirements of IRC section 1446 may be liable for any unpaid 1446 tax and subject to any applicable addition to the tax, interest, and penalties under IRC section 1446. A foreign partnership that is subject to withholding under IRC section 1445(a) (FIRPTA) during its taxable year may credit the amount withheld under IRC section 1445(a) against its IRC section 1446 tax liability for that taxable year only to the extent such amount is allocable to foreign partners. Refer to Treasury Regulation section 1.1446-4(f)(4) for rules coordinating the withholding liability of publicly traded partnerships under IRC sections 1445 and 1446. Are you paying your installment payments properly? When you pay the withholding tax required under IRC section 1446 carefully follow the guidance provided in Instructions for Forms 8804, 8805, and 8813. Use Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446), to pay quarterly installments of withholding tax under IRC section 1446 to the United States Treasury. Form 8813 must accompany each payment of IRC section 1446 tax made during the partnership's tax year. File Form 8813 on or before the 15th day of the 4th, 6th, 9th, and 12th months of the partnership's tax year for U.S. income tax purposes. Mail the voucher with a check or money order in U.S. currency payable to the "United States Treasury." Write the partnership's Employer Identification Number, tax year, and "Form 8813" on the check or money order. File Form 8813 with: Internal Revenue Service Center P.O. Box 409101 Ogden UT 84409 Generally, pay any additional amounts due when filing Form 8804. However, if the partnership files Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, to request an extension of time to file Form 8804, pay the balance of IRC section 1446 withholding tax estimated to be due with Form 7004 in order to avoid the late payment penalty. The use of Form 7004 does not automatically extend the time for payment of the tax due. Filing in accordance with the instructions will ensure the payments are credited to the proper account. The submission of a payment with Form 8813 does not totally satisfy the partnership's responsibility for filing. In addition, the partnership must file Form 8804 with the IRS and Form 8805 with the IRS and the foreign partner after the end of the partnership's calendar or fiscal year. Is it time to update foreign partners' U.S. TINs? In order for a foreign partner to claim a refund a valid Taxpayer Identification Number (TIN) is required. A foreign partner must file an income tax return (Form 1040NR, Form 1120F, etc.) with a valid TIN. Note that Individual Taxpayer Identification numbers (ITINs) that haven't been included on a U.S. federal tax return at least once in the last three consecutive tax years will expire. In addition, certain ITINs will expire according to an annual schedule based on the middle digits of the ITIN (Refer to Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number (ITIN) PDF for details). You need to take action to renew it if it'll be included on a U.S. federal tax return. Are your foreign partners aware of this? This is especially important with respect to partnership withholding. A foreign or domestic partnership (other than a publicly traded partnership) that has effectively connected taxable income allocable to a foreign partner must pay a withholding tax under IRC section 1446 equal to the applicable percentage of the effectively connected taxable income that is allocable to its foreign partners. A partnership must pay the withholding tax for a foreign partner even if the partnership does not have a U.S. TIN for that partner. Foreign partners must attach Copy C of Form 8805 to their U.S. income tax returns to claim a credit for their share of the IRC section 1446 tax withheld by the partnership. To ensure proper crediting of the withholding tax when reporting to the IRS, a partnership must provide a U.S. TIN for each foreign partner. The partnership should notify any of its foreign partners without a valid TIN of the necessity of obtaining a U.S. TIN. An individual's TIN is the individual's social security number (SSN) or ITIN. An ITIN is a nine-digit number that will always begin with a 9, is formatted like an SSN and has the fourth and fifth digits in the range of "50" to "65", "70" to "88", “90” to “92” or “94” to “99”. It is also possible that a partner's TIN could be its U.S. employer identification number (EIN). NOTE: Certain aliens who cannot obtain SSNs can now apply for ITINs on Form W-7, Application for IRS Individual Taxpayer Identification Number. Partnerships should review their files and/or contact their foreign partners to verify that each foreign partner has a valid TIN. Related Partnership Withholding NRA Withholding Reporting and Paying Tax on Partnership Withholding Instructions for Form 8288 Instructions for Forms 8804, 8805, and 8813 ITIN Expiration Frequently Asked Questions Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, Publication 541, Partnerships Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number (ITIN) PDF Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax code, regulations, and official guidance page. To access any Tax Court cases filed on or after May 1, 1986, visit the Opinions Search page of the United States Tax Court.
