Tax Insights

Your Guide to State, Local, Federal, Estate + International Taxation

Does your partnership have a foreign partner?

international taxIf you have a foreign partner in your partnership, you may need to pay a withholding tax on that partner. A partnership that has income effectively connected with a U.S. trade or business is required to pay a withholding tax on the effectively connected taxable income that is allocable to its foreign partners. A foreign partner is anyone who is not considered a U.S. person. This includes nonresident aliens, foreign corporations, foreign partnerships, and foreign trusts or estates.

The partnership must pay the withholding tax regardless of the foreign partner’s ultimate U.S. tax liability for the year and even if the partnership did not make any distributions during the year. The amount of withholding tax is the highest tax rate at that time (37% and 21% for individuals and corporations, respectively, in 2018). The effectively connected taxable income is income that is effectively connected to a U.S. trade or business. Generally speaking, not effectively connected U.S. source income (fixed, determinable, annual and periodic) should be withheld on a gross basis at 30% unless the treaty provides for a reduction in this amount.

The partnership agreement should be reviewed to determine the allocable amount to each partner. Each foreign partner will have his equity account adjusted to reflect the applicable tax payment remitted on his behalf. These payments are then reported on the foreign partner’s U.S. income tax return and will offset the U.S. tax liability ultimately assessed on him personally.

The withholding tax must be paid on a quarterly basis, before the fifteenth day of the fourth, sixth, ninth, and twelfth months of the partnership’s tax year. Therefore, the partnership should review the allocable foreign partner’s share of taxable income throughout the year and pay the withholding tax accordingly to avoid any penalties at year end.

Jill A. Helm, CPA

Comments

  1. Mike says:

    I have a US Partnership that does business in China. The Partnership has 3 partners, 2 US and one Canadian. Does the partnership need to withhold for the Canadian Partner if since the business is not transacted in the US? Thanks

    • admin says:

      Mike,

      We cannot give tax advice: the information below is general in nature and should not be relied upon. You should contact both a US tax advisor and a Canadian tax advisor in order to obtain specific tax advice. As with any tax advice, conclusions are often fact specific and hence giving advice without knowing all the facts would not be in your best interest. We can refer a firm to you and our firm may also be engaged to assist with your US tax filings should you require our services.

      Thank you for your inquiry. Generally speaking, foreign partner withholding is required on income effectively connected with a US trade or business, and USA source passive income. In order to provide specific tax advice, we would need have a full understanding of your situation. As such, we need to be formally engaged for about an hour of consulting. My billing rate is $195/hr. If the engagement is such that more expertise is required, the following bill rates would apply:
      Manager $230
      Partner$360

      Please let us know if you would like to proceed and we can send a consulting engagement letter.

      Jill Helm, CPA

  2. harlang says:

    how can i transfer a certain amount of money through accounts, and is foreign partnership needed for that?

    • admin says:

      Harlang-

      Please check your email for a response from Jill Helm. Thanks for reading our blog!