You Have A Foreign Partner in Your U.S Partnership- What Next?

 

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They say life is a series of coincidences. This blog topic had been brewing in my head for many days when I had not one but two prospective clients book appointments on the same day with the same question! "I want to bring in a foreign person as a partner in my U.S. business. Do I need to do anything in addition for tax filing and reporting?"

We have said this here earlier, the United States is an attractive destination for setting up and doing business. If a non-resident individual has an opportunity to invest in an already existing business in the US, that would not be something they would pass on. On the other hand, being able to bring in a foreign partner will give the U.S. partnership additional resources such as access to international expansion networking opportunities and other skill sets that may enhance the partnership's profits in a big way. 

As a foreign investor in a U.S. partnership or as the manager of the U.S. partnership with foreign partners, there are various additional tax and reporting obligations required of the partnership that one should be aware of. 

We will briefly dig into these today:  

Who can be a foreign partner?

Any foreign person can be a partner in a U.S partnership. A foreign person includes a nonresident individual, foreign corporation, foreign partnership, foreign trust or estate and any other person who is not a U.S. person. 

What are the tax and reporting consequences of having a foreign partner in a U.S. Partnership? 

Both the U.S. partnership as well as the foreign partner have tax and reporting obligations under IRC §1445 (if applicable) and §1446. 

In addition to filling Form 1065 and providing Schedules K-1 to all partners by the original or extended due date, the U.S partnership will have the following tax and reporting obligations: 

• The U.S. partnership has to withhold tax under §1446 for the foreign partners' share of "Effectively Connected Taxable Income" [ECTI] or on the foreign partner's share of fixed, determinable annual or periodical gains and income. 
• The U.S. partnership which is engaged in the conduct of a trade or business within the United States will also have tax withholding requirements under §1446(f) if the foreign partner sold their partnership interest. This is reported via Form 8288 to the IRS. 
• There will be other obligations under Foreign Investment in Real Property Tax Act [FIRPTA] and Foreign Account Tax Compliance Act [FATCA] as well if applicable. Taxes withheld if any must be reported via Form 1042-S to the foreign partner. 
• The US partnership needs to make quarterly payments of taxes to the IRS via Form 8813. Due dates are April 15th, June 15th, September 15th and December 15th for calendar year filers OR the 15th day of the 4th, 6th, 9th & 12th month of the partnership's tax years. 
• The partnership also must file Forms 8804 and 8805 with the IRS after the end of the year showing the total amounts already paid and any additional amounts can be paid with these forms. 
• Keep the foreign partners' Forms W-8 series on file and check if the foreign partner has claimed reduced withholding under treaty benefits. 
• The partnership must educate the foreign partner of their filing requirements. 
• Non-compliance with tax withholding requirements will result in penalties and interest for the partnership.  

The tax and reporting obligations for the Foreign Partner are: 

• The foreign partner needs to have a valid Individual Tax Identification Number [ITIN] or Employer Identification Number [EIN]. This can be obtained with the help of a Certified Acceptance Agent [CAA]. There are CAAs based in many countries outside the United States. Link is attached in Bibliography below. 
• The foreign partner will need to file an appropriate form based on their entity type [for example a foreign corporate partner files a form 1120-F & so on] or an Individual files a form 1040-NR by the original or extended due date to tie out the tax paid via the partnership and they can claim a refund if applicable. They must attach copies of the form 8805 with their taxes. 
• The foreign partner must submit to the partnership engaged in US trade or business, a Form W-8ECI to show that their status is that of a nonresident individual or foreign entity. 
• If the partnership is not engaged in a US trade or business, then the foreign partner provides a Form W-8BEN or Form W-8BEN-E based on their entity type. 
• If the foreign partner is a resident of a country with whom the U.S. has a tax treaty and certain reduced withholding can be claimed via the Form W-8 filed with the partnership.   

If you are thinking of investing in a US partnership as a foreign person or are a partnership with foreign partners and any of these rules apply to you, please make sure you are working with qualified Circular 230 tax professionals who are able to guide you to make sure you do not miss out on important filings. Non-compliance will lead to heavy penalties and expensive long drawn out correspondence with the Internal Revenue Service. 

Related Blog Posts: 

What, Why, When, And Who Needs a Form W-8BEN?

Expiring ITINs? Here Is What You Need to Know

The New ITIN Rules, PATH Act and My 100th Post!!

Bibliography: Cornell §1.1446-1 Withholding tax; IRS Helpful Hints for Foreign Partners

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