Withholding Tax on Foreign Partners' Share of Effectively Connected Income – IRC Section 1446
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. Note: The withholding tax rate for effectively connected income allocable to non-corporate foreign partners is 39.6%, but remains at 35% for corporate foreign partners, for tax years beginning after December 3, 2012.
A publicly traded partnership must withhold tax on actual distributions of effectively connected income, unless it chooses to withhold under special Rules Applicable to Publicly Traded Partnerships.
This withholding tax regime under IRC section 1446 does not apply to income that is not effectively connected with the partnership's U.S. trade or business (i.e., it does not apply to FDAP income). FDAP 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.
Treasury Regulation section 1.1446-6 allows foreign partners to certify to the partnership prior year deductions and losses that carry over to the current year. Under these regulations a nonresident alien partner is also permitted to certify to the partnership that the partnership investment is (and will be) the only activity of the partner for the partner’s taxable year that gives rise to effectively connected income, gain, deduction, or loss. In that case, the partnership is not required to pay IRC section 1446 tax with respect to the foreign partner if the partnership estimates that the annualized or actual IRC section 1446 tax due is less than $1,000.
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) is required.
- Helpful Hints for Partnerships With Foreign Partners
- Who Must Withhold
- Reporting and Paying the Tax
- Publicly Traded Partnerships
- Rules Applicable to Publicly Traded Partnerships
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.