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Does your firm have a foreign partner?

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If you have a foreign partner in your firm, you may need to pay a withholding tax on that partner. Here is a quick breakdown of the rules.

The effectively connected taxable income is income that is effectively connected to the U.S. trade or business. If during a tax year the partnership has a taxable income effectively connected with the conduct of a trade or business within the United States that is allocable to a foreign partner, the partnership is required to report and pay a 35% withholding tax to the IRS. 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 partnership may reduce the foreign partner’s share of the partnership’s gross effectively connected income by certain partner level deductions and losses if the foreign partner certifies these losses on Form 8804-C.

On the other hand, non-effectively connected U.S. source income, FDAP INCOME  (fixed, determinable, annual and periodic payments)  income is subject to the NRA withholding tax regime, Forms 1042/1042-S, under which withholding is required under Internal Revenue Code Chapter 3 sections 1441, 1442, and 1443 (NRA Withholding). This withholding tax regime requires 30% withholding on a payment of U.S. source income to a foreign person, unless the treaty provides for a reduction in this amount. 

A partnership that fails to comply with withholding requirements may be subject to any unpaid tax, applicable addition to the tax, interest, and penalties under IRC section 1446. A foreign partner is required to file a U.S. income tax return even if there is no U.S. tax due. A valid Taxpayer Identification Number (TIN) or International Taxpayer Identification Number (ITIN) is required.

Book your free consultation today with Capital Protection Alliance Trusted Tax Advisor at http://capitalproalliance.com/helpstep1_business_services/ to learn more about foreign partner tax withholding and obtain IRS audit help.