Foreign Partners [Non-US Citizens] with U.S.A Based Foreign Partnership Income
An United States based partnership firm that has non-US Citizens/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)
Suppose 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. In that case, the Internal Revenue Code requires the partnership to report and pay a withholding tax under IRC Section 1446 to the IRS.
A partnership that fails to comply with IRC section 1446 reporting and withholding requirements may be subject to penalties and interest.
Fixed or 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)
The partners' share of income and relevant Federal tax withholding is reported on Form 1042S and the foreign partner needs to file a 1040NR tax return and claim back any excess tax withholding done by the US partnership firm.
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).
For more information on the FIRPTA, please check here
Withholding on a 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.
The partners' share of income and relevant Federal tax withholding is reported on Form 8805/1042S/8288/8288A and the foreign partner needs to file a 1040NR Federal tax return and claim back any excess tax withholding done by the US partnership firm.
If you need assistance completing form Form W-7 for an ITIN application or reclaiming the FIRPTA tax/8805/1042S. Our team can assist. We are one of the IRS-approved Certified Acceptance Agents (CAA) with many years of experience dealing with ITIN office and FIRPTA work.