Who Must Withhold

The partnership, or a withholding agent for the partnership, must pay the withholding tax. A partnership that must pay the withholding tax but fails to do so, may be liable for the payment of the tax and any penalties and interest.

Foreign Partner

The partnership must determine whether a partner is a foreign partner. A foreign partner can be a nonresident alien individual, foreign corporation, foreign partnership, or foreign estate or trust. The following information will assist you in determining a partner's U.S. or foreign status.

A partnership may rely on a partner's certification of non-foreign status and assume that a partner is not a foreign partner if the partner provides a certification to the partnership that:

1. States that the partner is not a foreign person,
2. Gives the partner's name, U. S. taxpayer identification number, and address,
3. States that the partner will notify the partnership within 60 days of a change to foreign status, and
4. Is signed under penalties of perjury.

Sample certifications are contained in section 5.04 of Revenue Procedure 89- 31, in Cumulative Bulletin 1989- 1. The partnership must keep the certification 5 years after the last tax year in which the partnership relied on it.

Unless the partnership knows that the certification is incorrect, it may rely on it until one of the following happens.

1. The third year after the partnership's tax year in which the certification was made ends.
2. The partner notifies the partnership that it has become a foreign partner.
3. The partnership learns that the partner is a foreign partner.

Widely Held and Publicly Traded Partnerships

A partnership with more than 200 partners or a publicly traded partnership may rely on statements received on Form W-9 in lieu of the above certification. It may also rely on a certification from a nominee that a partner owning a partnership interest through the nominee is not a foreign partner. In this situation, the nominee may rely on a partner's certification of non-foreign status, or it may rely on Form W- 9.

Amount of Withholding Tax

The withholding tax that a partnership must pay for the partnership's tax year is based on its effectively connected taxable income that is allocable to its foreign partners for that tax year. The amount of a partnership's effectively connected taxable income that is allocable to a foreign partner is the foreign partner's distributive share of the partnership's gross effectively connected income reduced by the partner's distributive share of partnership deductions for the year. For information on effectively connected income and how to figure a partner's distributive share of income and deductions, refer to the Instructions for Forms 8804, 8805, and 8813.

A partnership must make installment payments of withholding tax on its foreign partners' share of effectively connected taxable income whether or not distributions are made during the partnership's tax year.

Tax Rate

The withholding tax rate on a partner's share of effectively connected income is 35%. This rate may change from time to time based on new tax legislation.

Amount of Installment Payment

The amount of a partnership's installment payment is the sum of the installment payments for each of its foreign partners. The amount of each foreign partner's installment payment of withholding tax can be figured by using the worksheet in the Instructions for Forms 8804, 8805, and 8813.

Time Withholding Tax Is Considered Paid

A foreign partner's share of withholding tax paid by a partnership is treated as distributed to the partner on the earliest of:

1. The day on which the tax was paid by the partnership,
2. The last day of the partnership's tax year for which the tax was paid, or
3. The last day on which the partner owned an interest in the partnership during that year.

Date Payments are Due

Payments of withholding tax must be made during the partnership's tax year in which the effectively connected taxable income is derived. A partnership must pay the IRS a portion of the annual withholding tax for its foreign partners by the 15th day of the 4th, 6th, 9th, and 12th months of its tax year for U.S. income tax purposes. Any additional amounts due are to be paid with Form 8804, the annual partnership withholding tax return.

Real Property Gains

If a domestic partnership disposes of a U. S. real property interest, the gain is treated as effectively connected income and the partnership or withholding agent must withhold following the rules discussed here. A domestic partnership's compliance with these rules satisfies the requirements for withholding on the disposition of U. S. real property interests (discussed under U.S. Real Property Interest). This also applies to publicly traded partner-ships that elect to withhold based on effectively connected income instead of on actual distributions.