Foreign Partners: What a US Partnership Must Withhold and File

Must the partnership withhold if it pays out no cash?

Yes. A partnership with effectively connected taxable income (ECTI) allocable to a foreign partner must pay section 1446 withholding on that partner's share, whether or not it distributes cash. The partnership needs a way to fund the payment even when it retains all earnings (IRS: Form 8804 instructions; 26 CFR 1.1446-3).

ECTI means income connected with a US trade or business, reduced by deductions connected with that income and adjusted under the partnership withholding rules. It is the foreign partner's allocated share, not the partner's cash draw. Whether a particular activity produces effectively connected income is a separate question; see when foreign owners owe US tax.

If a non-publicly traded partnership has effectively connected gross income allocable to a foreign partner, it generally files Form 8804 even when deductions leave no ECTI or withholding due (IRS: Form 8804 instructions).

Who is a foreign partner, and what documentation is needed?

A foreign partner is a partner who is not a US person for federal tax purposes. This can be a nonresident individual, foreign corporation, foreign partnership, or foreign trust or estate. A non-US citizen who is a US resident alien for tax purposes is generally a US person and gives Form W-9; a nonresident alien generally gives Form W-8BEN. Check tax residence when a partner moves to or from the United States (IRS: Form 8804 instructions; IRS: Form W-9 requester instructions).

The IRS also lists Forms W-8ECI and W-8EXP for situations where they fit. Use a valid status form, or reliable other means to establish US status, before reducing withholding. Without a valid certificate or other reliable proof of US status, the partnership generally must presume the partner is foreign; an expired or unreliable certificate cannot support a lower amount. Collect each foreign partner's US taxpayer identification number so the IRS can credit the withholding. A missing number does not remove the duty to pay (IRS: Form 8804 instructions; 26 CFR 1.1446-1(c)).

What rate applies, and to which income?

The partnership generally applies 37% to a noncorporate foreign partner's ECTI and 21% to a corporate foreign partner's ECTI. Certain types of income allocated to a noncorporate partner may qualify for a lower applicable rate if the partnership can establish the conditions. These are withholding calculations, not the partner's final income tax (IRS: Form 8804 instructions).

The partnership computes ECTI from effectively connected gross income less connected deductions allocable to the foreign partner. Income exempt for that partner under a treaty, reciprocal agreement, or the Internal Revenue Code is excluded from ECTI only to the extent the exemption applies. Check the partner's status and treaty facts before reducing withholding (IRS: Form 8804 instructions).

For US rent, a nonresident individual or foreign corporation can elect under section 871(d) or 882(d) to treat it as effectively connected. The partner attaches the election to an original or amended return for that year within the section 6511 claim period (generally the later of three years after filing or two years after payment), then gives the partnership Form W-8ECI and the election or an intent statement. This changes withholding and the partner's Schedule K-3 (26 CFR 1.871-10(d); 26 USC 6511(a); IRS: Schedule K-2 and K-3 instructions).

When are Form 8813 installments due?

Form 8813 payments are generally due on the 15th day of the fourth, sixth, ninth, and twelfth months of the partnership's tax year. A calendar-year partnership therefore uses April 15, June 15, September 15, and December 15. The partnership estimates and updates the tax for each foreign partner using Form 8804-W; it does not wait for the annual return (IRS: Form 8804 instructions).

After paying an installment, the partnership must notify foreign partners of their allocable shares of tax paid within 10 days of the installment due date or payment date, as applicable. The partner can use that information when estimating personal or corporate tax (IRS: Form 8804 instructions).

What are Forms 8804 and 8805, and when are they due?

Form 8804 reports the partnership's annual section 1446 withholding liability. Form 8805 reports each foreign partner's ECTI and withholding credit. File them separately from Form 1065 by the 15th day of the third month after the partnership's year-end; a partnership keeping its books and records outside the United States and Puerto Rico generally has until the 15th day of the sixth month (IRS: Form 8804 instructions).

For a calendar-year partnership, this is generally March 15 of the next year, or June 15 under that books-and-records rule. A weekend or legal holiday moves the due date to the next business day (IRS: Form 8804 instructions).

File a separate Form 8805 for each foreign partner when required, including when tax was paid, a treaty or reciprocal exemption applies, or Form 8804-C or a permitted state-tax reduction reduced withholding to zero. The partnership's Form 1065 and Schedules K-1 have their own rules; see how partnerships are taxed (IRS: Form 8804 instructions).

How does the foreign partner claim the tax withheld?

The foreign partner uses the Form 8805 credit on its own US income tax return, attaching the form. A nonresident individual generally enters it on Form 1040-NR; a foreign corporation generally claims it on Form 1120-F. Withholding may exceed or fall short of the partner's final tax, so the partner still needs to determine its return and balance or refund (IRS: Form 8804 instructions; Form 1040-NR instructions; Form 1120-F instructions).

Match the partner's name and US taxpayer identification number across the status form, Form 8805, and the partner's return. Keep the annual Form 8805 and installment notices with the Schedule K-1; the Form 8805 substantiates the federal withholding credit.

Can Form 8804-C reduce withholding?

Yes, an eligible nonresident alien individual or foreign corporation can certify qualifying partner-level deductions or losses on Form 8804-C if the partnership can rely on it. Tiered partnerships and grantor trusts have special rules. The partner or authorized representative signs a new certificate for each year used and gives it to the partnership during that year, before it files Form 8804. The partnership is not required to accept it. Prior US return and payment history can affect eligibility (IRS: Form 8804-C instructions; 26 CFR 1.1446-6).

A nonresident alien individual can use a separate certificate to eliminate withholding when the partnership interest is the partner's only activity producing effectively connected items and the annualized withholding otherwise due is less than $1,000, measured before certified losses and state-tax reductions. This is a strict less-than test, not a general exemption for small partnerships (26 CFR 1.1446-6).

The partnership may also consider 90% of state and local income tax it actually withheld and remitted for that partner on the partner's ECTI; it cannot use its own state taxes. When Form 8804-C or this state-tax reduction lowers an installment, file Form 8813 with the required calculation and certificate or substitute information even if no federal tax is due for that installment. Attach the required items to Form 8805 too (IRS: Form 8804 instructions).

What other forms can a partnership with foreign partners need?

The partnership may also need Schedules K-2 and K-3 for a foreign partner's US tax information, plus Forms 1042 and 1042-S for covered US-source income that is not effectively connected, such as dividends or royalties. These forms serve different purposes from Forms 8804 and 8805 (IRS: Schedule K-2 and K-3 instructions; IRS: Publication 515).

The latest published Schedule K-2/K-3 instructions are for the prior tax year; confirm the instructions for this page's tax year when they are released. Forms 1042 and 1042-S generally use a calendar-year reporting cycle and are due March 15 after the payment year (IRS: Publication 515).

What happens when a foreign partner sells or leaves?

A buyer of a foreign partner's interest generally must withhold 10% of the amount realized under section 1446(f) if any gain would be connected with a US business, unless a documented exception applies. The partnership itself can be the buyer when it buys back an interest. Amount realized can include cash, property, and the seller's share of partnership liabilities. It is not simply the seller's gain or cash received (IRS: Publication 541; Form 8288 instructions).

The buyer generally files Forms 8288 and 8288-A and pays the withholding by the 20th day after the transfer. If a distribution to a foreign partner produces gain under section 731, the partnership itself can be the transferee required to withhold and file those forms. If both section 1445 real property withholding and section 1446(f) could apply, section 1445 generally controls payment and reporting (Form 8288 instructions).

The IRS generally sends the seller a stamped Form 8288-A when it has the seller's US taxpayer identification number. The seller generally attaches it to a US return to claim the sale withholding credit, separate from the annual Form 8805 credit (Form 8288 instructions).

If a buyer failed to withhold and no exception applies, the partnership generally withholds the full amount of each later distribution to that buyer until it recovers the missing transfer withholding plus interest. This starts on the later of 30 days after the transfer or 15 days after the partnership learns of it; report the withholding on Forms 8288 and 8288-C. Get the sale agreement, liability figures, and any claimed exception certificate before closing (Form 8288 instructions).

What if the partnership did not withhold or file?

The partnership can remain liable for unpaid section 1446 tax, interest, and separate penalties for late installments, late payment, a late Form 8804, and missing or incorrect Forms 8805. A filing extension does not extend the tax payment deadline. Reasonable cause may remove some penalties. If a foreign partner paid all tax required on that partner's US return, the partnership can present proof to the IRS and may be treated as having paid its section 1446 tax for that partner. Interest, installment additions, and other penalties can remain (IRS: Form 8804 instructions; 26 CFR 1.1446-3).

Reconstruct each year's ECTI and partner allocations first. Gather partner Forms W-8 and W-9, Forms 1065 and K-1, Forms 8813 and payment records, prior Forms 8804 and 8805, and any Forms 8804-C. Calculate unpaid section 1446 tax, reconcile the partner's own tax payments, and pay any remaining liability. File missing Forms 8804 and 8805 and correct forms with wrong figures. For several unfiled business returns, see catching up on unfiled business returns; for the separate Form 1065 penalty, see late filing and payment penalties.

Do states require their own withholding?

Yes, state rules can add withholding on income sourced to that state. California, for example, requires a partnership or LLC to review foreign partner withholding on California-source income, remit required withholding with Form 592-A, and file Form 592-F when required. Its installment schedule follows the federal fourth, sixth, ninth, and twelfth-month pattern. Form 592-F is due by the 15th day of the third month after year-end, or the sixth month if all partners are foreign. Notify partners of withholding during the year and furnish each partner with reported withholding Form 592-B by that same annual deadline (California FTB: Form 592-F instructions; FTB: Form 592-B instructions; FTB Publication 1017).

California's income base and rates are separate from the federal calculation. Check each state where the partnership earns or allocates income; federal Form 8805 does not replace a state withholding return.

Example

Illustrative amounts in US dollars. A calendar-year partnership has US$200,000 of ECTI and allocates one-quarter, or US$50,000, to a foreign individual. It makes no cash distribution. With no applicable reduction or preferential rate, the federal section 1446(a) withholding calculation is US$50,000 × 37% = US$18,500. The partnership funds installments during the year, reports the annual amount on Forms 8804 and 8805, and gives the partner Form 8805. The partner uses that form to claim the US$18,500 credit on a US return; the actual tax may differ.

Different for you?

• The partnership has no US business income: first determine whether the income is effectively connected in when foreign owners owe US tax.
• You are unsure whether a family-owned LLC is a partnership: see spouse and family LLCs.
• You are choosing a structure before adding foreign owners: see forming and running a company from abroad.
• A partner is resident in Canada: the Canadian treatment is separate; see Canadian owner of a US LLC.
• A partner sold an interest, claims a treaty exemption, or the partnership missed withholding: the certificate, timing, and liability facts call for cross-border tax review.