Foreign Partner

A partner that is a foreign person should provide the appropriate Form W-8 (as shown in Chart D) to the partnership.

Partners who have otherwise provided Form W-8 to a partnership for purposes of section 1441 or 1442, as discussed earlier, can use the same form for purposes of

section 1446(a) if they meet the requirements discussed earlier under documentation. However, a foreign simple trust that has provided documentation for its beneficiaries for purposes of section 1441 must provide a Form W-8 on its own behalf for purposes of section 1446.

The partnership may not rely on the certification if it has actual knowledge or has reason to know that any information on the form is incorrect or unreliable.

The partnership must keep the certification for as long as it may be relevant to the partnership’s liability for section 1446 tax.

Amount of Withholding Tax

The amount a partnership must withhold is based on its ECTI that is allocable to its foreign partners for the partnership’s tax year. However, see Publicly Traded Partner- ship Distributions , later.

Reduction of withholding. The foreign partner’s share of the partnership’s gross ECI is reduced by the following.

• The partner’s share of partnership deductions connected to that income for the year.

• The partner’s tax treaty benefits related to that income (see Chart D for documentation).

The partnership may reduce the foreign partner’s share of partnership gross ECI by the following.

1. State and local income taxes the partnership withholds and pays on behalf of the partner on current-year ECTI allocated to the partner.

2. The foreign partner’s partner-level deductions and losses that the partner certifies to the partnership as:

a. Carried forward from a prior year,

b. Properly allocated to gross ECI of the partner’s

trade or business in the United States, and

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c. Reasonably expected to be available and claimed

on the partner’s U.S. income tax return.

To certify the deductions and losses, a partner must submit to the partnership Form 8804-C, Certificate of Partner-Level Items to Reduce Section 1446 Withholding.

If the partner’s investment in the partnership is the only activity producing ECI and the section 1446 tax is less than $1,000, no withholding is required. The partner must provide Form 8804-C to the partnership to receive the exemption from withholding.

A foreign partner may submit a Form 8804-C to a partnership at any time during the partnership’s year and prior to the partnership’s filing of its Form 8804, Annual Return for Partnership Withholding Tax (Section 1446). An updated certificate is required when the facts or representations made in the original certificate have changed or a status report is required.

For more information, see the Instructions for Form 8804-C .

Tax rate. The withholding tax rate on a partner’s share of ECTI is 37% for noncorporate partners and 21% for corporate partners. However, the partnership may withhold at the highest rate applicable to a particular type of income allocated to a partner provided the partnership received the appropriate documentation. See Regulations section 1.1446-3(a)(2)(ii).

Installment payments. A partnership must make installment payments of withholding tax on its foreign partners’ share of ECTI whether or not distributions are made during the partnership’s tax year. 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 installment payment can be figured by using Form 8804-W, Installment Payments of Section 1446 Tax for Partnerships.

Date payments are due. Payments of withholding tax must be made during the partnership’s tax year in which the ECTI is derived. A partnership must pay the IRS a part 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, discussed later.

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

• The day on which the tax was paid by the partnership,

• The last day of the partnership’s tax year for which the tax was paid, or

• The last day on which the partner owned an interest in the partnership during that year.

The amount treated as distributed to the partner resulting from an installment payment is generally treated as an advance or draw under Regulations section 1.731-1(a)(1)

(ii) to the extent of the partner’s share of income for the partnership year.

Notification to partners. In most cases, a partnership must notify each foreign partner of the tax withheld on its behalf within 10 days of the installment payment date. No particular form is required for this notification. For more information on the substance of the notification and exceptions, see Regulations section 1.1446-3(d)(1)(i).

Real property transfers. If a domestic partnership disposes of a USRPI, gain or loss from the sale allocable to a foreign partner is treated as effectively connected to the conduct of a U.S. trade or business and is included in ECTI. The partnership or withholding agent must withhold following the rules discussed here for section 1446(a) withholding. A domestic partnership’s compliance with these rules satisfies the requirements for withholding on the disposition of U.S. real property interests (discussed later).

If a foreign partnership disposes of a U.S. property interest, the transferee must withhold under section 1445(a), although gain or loss from the sale is also treated as effectively connected to the conduct of a U.S. trade or business and is included in ECTI. The foreign partnership may credit the amount withheld under section 1445(a) that is allocable to foreign partners against its tax liability under section 1446.

Transfers of interests in partnerships engaged in the conduct of a U.S. trade or business. If a domestic partnership transfers a direct or indirect interest in another partnership engaged in the conduct of a U.S. trade or business, gain or loss from the sale allocable to a foreign partner that is treated under section 864(c)(8) as effectively connected to the conduct of a U.S. trade or business is included in ECTI.

If a foreign partnership transfers an interest in another partnership for a gain and section 864(c)(8) treats any portion of that gain as effectively connected with the conduct of a trade or business in the United States, then the partnership will be withheld upon under section 1446(f)(1). The foreign partnership may credit the amount withheld under section 1446(f)(1) that is allocable to foreign partners against its tax liability under section 1446(a).

Reporting and Paying the Tax

Three forms are required for reporting and paying over tax withheld on ECTI allocable to foreign partners. This does not apply to PTPs, discussed later.

Form 8804. The withholding tax liability of the partnership for its tax year is reported on Form 8804. Form 8804 is also a transmittal form for Forms 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax.

Any additional withholding tax owed for the partnership’s tax year is paid (in U.S. currency) with Form 8804.

File Form 8804 by the 15th day of the 3rd month after the close of the partnership’s tax year. If you need more

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time to file Form 8804, file Form 7004 to request an extension of time to file. Form 7004 does not extend the time to pay the tax.

Form 8805. This form is used to show the amount of ECTI and any withholding tax payments allocable to a foreign partner for the partnership’s tax year. At the end of the partnership’s tax year, Form 8805 must be sent to each foreign partner on whose behalf tax under section 1446 was withheld or whose Form 8804-C the partnership considered, whether or not any withholding tax is paid. It must be delivered to the foreign partner by the due date of the partnership return (including extensions). A copy of Form 8805 for each foreign partner must also be attached to Form 8804 when it is filed. Also, attach the most recent Form 8804-C, discussed earlier, to the Form 8805 filed for the partnership’s tax year in which the Form 8804-C was considered.

A copy of Form 8805 must be attached to the foreign partner’s U.S. income tax return to take a credit on its Form 1040-NR or Form 1120-F.

Form 8813. This form is used to make payments of withheld tax to the U.S. Treasury. Payments must be made in U.S. currency by the payment dates (see Date payments are due, earlier). See the Instructions for Form 8804-C for when you must attach a copy of that form to Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446).

Penalties. A penalty may be imposed for the following.

• Failure to file Form 8804 when due (including extensions).

• Failure to file Form 8805 when due (including extensions) or to provide complete and correct information.

• Failure to provide a complete and correct Form 8805 to each partner when due (including extensions).

Exception. No penalty is imposed if you meet certain requirements. However, if a filer intentionally disregards the requirement to file Form 8805 when due, to furnish Form 8805 to the recipient when due, or to report correct information, the penalty for each Form 8805 (or statement to recipient) may be higher.

For more information, see Interest and Penalties in the Instructions for Forms 8804, 8805, and 8813 .

Identification numbers. A partnership that has not been assigned a U.S. EIN must obtain one. If a number has not been assigned by the due date of the first withholding tax payment, the partnership should enter the date the number was applied for on Form 8813 when making its payment. As soon as the partnership receives its EIN, it must immediately provide that number to the IRS.

To ensure proper crediting of the withholding tax when reporting to the IRS, the partnership must include each partner’s U.S. TIN on Form 8805. If there are partners in the partnership without identification numbers, the partnership should inform them of the need to get a number. See U.S. or Foreign TINs, earlier.