Helpful Hints for Partnerships With Foreign Partners

In addition to the filing of Form 1065, U.S. Return of Partnership Income, a partnership (U.S. or foreign) with foreign partners could be responsible for complying with other filing requirements such as Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), Partnership Withholding, and NRA Withholding.

If a partnership acquires a U.S. real property interest from a foreign person, the partnership may have to withhold tax under Section 1445 (FIRPTA) on the amount it pays for the property. If a partnership has income effectively connected with a trade or business in the United States, it must withhold on the income allocable to its foreign partners (Partnership Withholding). 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).

Foreign Investment in Real Property Tax Act of 1980 (FIRPTA)

A withholding obligation is generally imposed on the buyer or transferee when a U.S. real property interest is acquired from a foreign person. The withholding obligation applies to partnerships. This withholding serves to collect tax that may be owed by the foreign person. Generally, you must withhold 10% of the amount realized on the disposition by the transferor.

Partnership Withholding

It is important to note that 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 Section 1446 to the IRS. The partnership must pay the 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. Rev. Proc. 89-31, as amended by Revenue Procedure 92-66, sets forth the time and manner for paying the withholding tax, as well as the general reporting obligations with respect to the tax. Refer to Forms 8804, Annual Return for Partnership Withholding Tax (Section 1446), 8805, Foreign Partner's Information Statement of Section 1446 Withholding Tax, and 8813, Partnership Withholding Tax Payment Voucher (Section 1446), for further guidance on reporting and paying the section 1446 withholding tax. A partnership that fails to comply with section 1446 reporting and withholding requirements may be subject to penalties and/or interest.

Special rules apply to publicly traded partnerships. Publicly traded partnerships (within the meaning of Rev. Proc. 89-31) must file Forms 8804, 8805, and 8813only if they have elected to pay 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 section 10 of Rev. Proc. 89-31, as amended by Revenue Procedure 92-66.

Are You Paying Your Installment Payments Properly?

When you pay the withholding tax required under Section 1446 carefully follow the guidance provided in Instructions for Forms 8804, 8805, and 8813, and 8813, and the side-note mentioned on Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446).

Use Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446), to pay quarterly installments of withholding tax under Section 1446 to the United States Treasury. A Form 8813 must accompany each payment of 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
Philadelphia, PA 19255.

Generally, pay any additional amounts due when filing Form 8804. However, if the partnership files Form 2758 to request an extension of time to file Form 8804, pay the balance of Section 1446 withholding tax estimated to be due with Form 2758. The use of Form 2758 does not automatically extend the time for payment of the tax due.

Filing in accordance with the instructions will insure the payments are credited to the proper account.

The submission of a payment on 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.

NRA Withholding

In addition to the requirement to withhold under Section 1446, U.S. source income that is not effectively connected with the partnership's U. S. trade or business may be subject to withholding as required under IRC Sections 1441, 1442, 1443. Report this type of withholding on Form 1042 and Form(s) 1042-S. Refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities and to the Instructions for Form 1042-S.

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. The temporary IRS numbers previously issued in prior years are no longer valid. A change in Internal Revenue Code (IRC) Section 6109 regulations in 1996 mandates the use of a permanent TIN on tax returns.

Are Your Foreign Partners Aware of This?

This is especially important with respect to partnership withholding. A foreign or domestic partnership that has effectively connected taxable income allocable to a foreign partner must pay a withholding tax under 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 Form 8805 to their U.S. income tax returns to claim a credit for their share of the section 1446 tax withheld by the partnership. To insure proper crediting of the withholding tax when reporting to the IRS, a partnership must provide a U.S. taxpayer identification number (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. taxpayer identification number. An individual's taxpayer identification number is the individual's social security number (SSN) or individual taxpayer identification number (ITIN). An ITIN will always begin with a 9 , and the middle two digits will be in the range of 70 to 80 . 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.

Have you considered reviewing your files or contacting your foreign partners to verify that each foreign partner has a valid TIN?

References:

• Forms 8804, 8805, 8813 and Form 8804, 8805, 8813 Instructions
• Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, Section on Partnership Withholding on Effectively Connected Income
• Revenue Procedure 89-31
• Revenue Procedure 92-66
• Internal Revenue Code section 1446
• Internal Revenue Regulations under Section 1446