§1446 Withholding of tax on foreign partners’ share of effectively connected income

Summary

A partnership must withhold U.S. tax when it earns income from a U.S. trade or business that is assigned to partners who are not U.S. persons. The amount to withhold is the “applicable percentage” of that income: use the highest individual tax rate in section 1 for shares going to non‑corporate foreign partners, and the highest corporate rate in section 11(b) for shares going to foreign corporate partners. “Effectively connected taxable income” means the partnership’s taxable income tied to a U.S. business, figured with three special adjustments: one routine rule in section 703(a)(1) does not apply, a depletion deduction for oil and gas is allowed but is figured without the usual limits, and any items that are allocated to U.S. partners are left out. A foreign partner (anyone who is not a U.S. person) gets a credit under section 33 for their share of the tax the partnership paid. That credit is for the partner’s tax year that includes the end of the partnership’s year. The partner’s share of the withheld tax is treated as if the partnership gave it to the partner on either the day the partnership paid the tax or the last day of the partnership’s tax year, whichever comes first. When someone sells a partnership interest and the gain would be treated as U.S.‑connected under section 864(c)(8), the buyer must withhold 10% of the sales price unless the seller gives a sworn statement with a U.S. tax ID number saying they are not a foreign person. The buyer cannot rely on that statement if they know it’s false or if rules require the buyer to send the statement to the IRS and they don’t. The IRS may allow less withholding. If the buyer fails to withhold, the partnership must take the unpaid amount (plus interest) from money it pays the buyer. The IRS will issue rules needed to carry out these withholding and reporting duties, including special rules for publicly traded partnerships and for how this tax counts for certain penalty rules.