Publication 515 |
2000 Tax Year |
A partnership (foreign or domestic) that has income effectively
connected with a U.S. trade or business (or income treated as
effectively connected) must pay a withholding tax on the effectively
connected taxable income that is allocable to its foreign partners. A
publicly traded partnership must withhold tax on actual distributions
of effectively connected income, unless it chooses to withhold under
these rules. See Publicly Traded Partnerships, later.
This withholding tax does not apply to income that is not
effectively connected with the partnership's U.S. trade or business.
That income is subject to NRA withholding tax, as discussed earlier in
this publication.
Who Must Withhold
The partnership, or a withholding agent for the partnership, must
pay the withholding tax. A partnership that must pay the withholding
tax but fails to do so, may be liable for the payment of the tax and
any penalties and interest.
Foreign Partner
The partnership must determine whether a partner is a foreign
partner. A foreign partner can be a nonresident alien individual,
foreign corporation, foreign partnership, or foreign estate or trust.
A partnership may rely on a partner's certification of nonforeign
status and assume that a partner is not a foreign partner if the
partner provides a certification to the partnership that:
- States that the partner is not a foreign person,
- Gives the partner's name, U.S. taxpayer identification
number, and address,
- States that the partner will notify the partnership within
60 days of a change to foreign status, and
- Is signed under penalties of perjury.
Sample certifications are contained in section 5.04 of Revenue
Procedure 89-31, in Cumulative Bulletin 1989-1.
The partnership must keep the certification 5 years after the last
tax year in which the partnership relied on it.
Unless the partnership knows that the certification is incorrect,
it may rely on it until one of the following happens.
- The third year after the partnership's tax year in which the
certification was made ends.
- The partner notifies the partnership that it has become a
foreign partner.
- The partnership learns that the partner is a foreign
partner.
Widely held and publicly traded partnerships.
A partnership with more than 200 partners or a publicly traded
partnership may rely on statements received on Form W-9 in lieu
of the above certification. It may also rely on a certification from a
nominee that a partner owning a partnership interest through the
nominee is not a foreign partner. In this situation, the nominee may
rely on a partner's certification of nonforeign status as described
earlier, or it may rely on Form W-9.
Amount of Withholding Tax
The withholding tax that a partnership must pay for the
partnership's tax year is based on its effectively connected taxable
income that is allocable to its foreign partners for that tax year.
The amount of a partnership's effectively connected taxable income
that is allocable to a foreign partner is the foreign partner's
distributive share of the partnership's gross effectively connected
income reduced by the partner's distributive share of partnership
deductions for the year. For information on effectively connected
income and how to figure a partner's distributive share of income and
deductions, see the Instructions for Forms 8804, 8805, and 8813.
A partnership must make installment payments of withholding tax on
its foreign partners' share of effectively connected taxable income
whether or not distributions are made during the partnership's tax
year.
Tax rate.
The withholding tax rate on a partner's share of effectively
connected income is 35% for a partner taxed as a corporation and 39.6%
for all other partners, such as individuals, partnerships, trusts, and
estates.
Amount of installment payment.
The amount of a partnership's installment payment is the sum of the
installment payments for each of its foreign partners. The amount of
each foreign partner's installment payment of withholding tax can be
figured by using the worksheet in the Instructions for Forms
8804, 8805, and 8813.
Date payments are due. Payments of withholding tax must
be made during the partnership's tax year in which the effectively
connected taxable income is derived. A partnership must pay the IRS a
portion of the annual withholding tax for its foreign partners by the
15th day of the 4th, 6th, 9th, and 12th months of its tax year for
U.S. income tax purposes. Any additional amounts due are to be paid
with Form 8804, the annual partnership withholding tax return.
A foreign partner's share of withholding tax paid by a partnership
is treated as distributed to the partner on the earliest of:
- The day on which the tax was paid by the partnership,
- The last day of the partnership's tax year for which the tax
was paid, or
- The last day on which the partner owned an interest in the
partnership during that year.
Real property gains.
If a domestic partnership disposes of a U.S. real property
interest, the gain is treated as effectively connected income and the
partnership or withholding agent must withhold following the rules
discussed here. A domestic partnership's compliance with these rules
satisfies the requirements for withholding on the disposition of U.S.
real property interests (discussed later). This also applies to
publicly traded partnerships that elect to withhold based on
effectively connected income instead of on actual distributions as
discussed later.
Reporting and
Paying the Tax
Three forms are required for reporting and paying over tax withheld
on effectively connected income allocable to foreign partners.
Form 8804,
Annual Return for Partnership Withholding Tax (Section 1446).
The withholding tax liability of the partnership for its tax
year is reported on Form 8804. Form 8804 is also a transmittal form
for Forms 8805.
Any additional withholding tax owed for the partnership's tax year
is paid (in U.S. currency) with Form 8804. A Form 8805 for each
foreign partner must be attached to Form 8804, whether or not any
withholding tax was paid.
File Form 8804 by the 15th day of the 4th month after the close of
the partnership's tax year. However, a partnership made up of all
nonresident alien partners has until the 15th day of the 6th month
after the close of the partnership's tax year to file. If you need
more time to file Form 8804, you may file Form 2758 to request an
extension. Form 2758 does not extend the time to pay the tax.
Form 8805,
Foreign Partner's Information Statement of Section 1446
Withholding Tax. Form 8805 is used to show the amount of
effectively connected taxable income and any withholding tax payments
allocable to a foreign partner for the partnership's tax year. At the
end of the partnership's tax year, Form 8805 must be sent to each
foreign partner whether or not any withholding tax is paid. It should
be delivered to the foreign partner by the due date of the partnership
return (including extensions). A copy of Form 8805 for each foreign
partner must also be attached to Form 8804 when it is filed.
A copy of Form 8805 must be attached to the foreign partner's U.S.
income tax return to take a credit on its Form 1040NR or Form
1120-F.
Form 8813,
Partnership Withholding Tax Payment (Section 1446). This
form is used to make payments of withheld tax to the United States
Treasury. Payments must be made in U.S. currency by the payment dates
(see Date payments are due, earlier).
Penalties.
A penalty may be imposed for failure to file Form 8804 when due
(including extensions). It is the same as the penalty for Form 1042
discussed earlier under Returns Required.
A penalty may be imposed for failure to file Form 8805 when due
(including extensions) or for failure to provide complete and correct
information. The amount of the penalty depends on when you file a
correct Form 8805. The penalty for each Form 8805 is:
- $15 if you file a correct form within 30 days, with a
maximum penalty of $75,000 per year ($25,000 for a small business),
or
- $50 if you file after 30 days or do not file a correct form,
with a maximum penalty of $250,000 per year ($100,000 for a small
business).
A small business is a business that has average annual gross
receipts of not more than $5 million for the most recent 3 tax years
(or for the period of its existence, if shorter) ending before the
calendar year in which the Forms 8805 are due.
If you fail to provide a complete and correct Form 8805 to each
partner, a penalty of $50 for each failure may be imposed. The maximum
penalty is $100,000 per year.
If you intentionally disregard the requirement to report correct
information, the penalty for each Form 8805 is the greater of $100 or
10% of the total amount of the items that must be reported, with no
maximum penalty.
Identification numbers.
A partnership that has not been assigned a U.S. TIN must obtain
one. If a number has not been assigned by the due date of the first
withholding tax payment, the partnership should enter the date the
number was applied for on Form 8813 when making its payment. As soon
as the partnership receives its TIN, it must immediately provide that
number to the IRS.
To ensure proper crediting of the withholding tax when reporting to
the IRS, the partnership must include each partner's U.S. TIN on Form
8805. If there are partners in the partnership without identification
numbers, the partnership should inform them of the need to get a
number. See U.S. Taxpayer Identification Numbers, earlier.
Publicly Traded Partnerships
A publicly traded partnership that has effectively connected
income, gain, or loss must pay withholding tax on any distributions of
that income made to its foreign partners. In this situation, a
publicly traded partnership must use Forms 1042 and 1042-S
(Income Code 27) to report withholding from distributions. The rate of
withholding is 39.6%.
A publicly traded partnership is any partnership an interest in
which is regularly traded on an established securities market
regardless of the number of its partners. This does not include a
publicly traded partnership treated as a corporation under section
7704 of the Internal Revenue Code.
Foreign partner.
The partnership determines whether a partner is a foreign partner
using the rules discussed earlier under Foreign Partner.
Election to withhold on effectively connected taxable income.
A publicly traded partnership can elect to pay a withholding tax on
its effectively connected taxable income allocable to foreign partners
instead of on its actual distributions. The partnership makes this
election by filing Forms 8804, 8805, and 8813 and by complying with
the payment and reporting requirements for those forms, as discussed
earlier. Once the election has been made, it can be revoked only with
the consent of the IRS.
Distributions subject to NRA withholding.
If the election to withhold on effectively connected taxable income
is not made, the partnership must withhold tax on any actual
distributions of money or property to foreign partners. In the case of
a partnership that receives a partnership distribution from another
partnership (a tiered partnership), the distribution also includes the
tax withheld from that distribution.
If the distribution is in property other than money, the
partnership cannot release the property until it has enough funds to
pay over the withholding tax.
A publicly traded partnership that complies with these withholding
requirements satisfies the requirements discussed later under
U.S. Real Property Interest. Distributions subject to
withholding include:
- The fair market value of U.S. real property interests
distributed to a partner and potentially subject to withholding under
section 1445(e)(4) of the Internal Revenue Code,
- Amounts subject to NRA withholding under section 1445(e)(1)
of the Internal Revenue Code on distributions pursuant to an election
under section 1.1445-5(c)(3) of the regulations, and
- Amounts not subject to NRA withholding under section 1445 of
the Internal Revenue Code because the distributee is a partnership or
is a foreign corporation that has made an election to be treated as a
domestic corporation.
Excluded amounts.
Partnership distributions are first considered to be paid out of
the following types of income in the order listed. To the extent the
partnership has this type of income, it is excluded from the
distributions subject to withholding discussed in this section.
- Amounts of noneffectively connected income distributed by
the partnership and subject to NRA withholding discussed
earlier.
- Amounts attributable to recurring dispositions of crops and
timber that are subject to NRA withholding under section
1.1445-5(c)(3)(iv) of the regulations.
- Amounts attributable to the disposition of a U.S. real
property interest subject to the withholding rules discussed next
under U.S. Real Property Interest.
For more information about the withholding requirements for
publicly traded partnerships, see Revenue Procedure 89-31 in
Cumulative Bulletin 1989-1.
Previous| First | Next
Publication Index | IRS-Forms Main | Home
|