§1446 Withholding of Tax on Foreign Partners’ Share of Effectively Connected Income

Summary

Partnerships must withhold tax when they have income tied to a U.S. trade or business and any of that income is allocated to partners who are not U.S. persons. The partnership’s tax equals an “applicable percentage” of the income allocated to foreign partners. “Applicable percentage” means the highest tax rate in section 1 for noncorporate foreign partners, and the highest rate in section 11(b) for foreign corporate partners. “Effectively connected taxable income” means the partnership’s taxable income tied to a U.S. trade or business, calculated with three adjustments: do not apply paragraph (1) of section 703(a); allow a depletion deduction for oil and gas without using sections 613 and 613A; and ignore items that are allocated to partners who are U.S. persons. Each foreign partner can claim a credit under section 33 for their share of the withholding. That credit is for the partner’s tax year that includes the end of the partnership year for which the tax was paid. Unless rules say otherwise, the partner’s share of the tax is treated as a distribution to the partner on the earlier of the day the partnership paid the tax or the last day of the partnership’s tax year. “Foreign partner” means any partner who is not a United States person. If gain from selling a partnership interest is treated as effectively connected under section 864(c)(8), the buyer must withhold 10 percent of the amount realized. No withholding is required if the seller gives a signed affidavit with a U.S. taxpayer ID number saying they are not foreign, unless the buyer knows the affidavit is false, gets a notice that it is false, or rules require filing the affidavit and the buyer fails to do so. The Secretary may allow a smaller withholding on request. If the buyer fails to withhold, the partnership must withhold the unpaid amount from distributions to the buyer, plus interest. The Treasury Secretary must write rules to carry out these duties, including rules for publicly traded partnerships and how this withholding affects section 6655.