Foreign Partnerships under Section 1446
When a foreign or domestic partnership has income that is connected with a U.S. business or trade, the IRS requires that the partnership pay out withholding taxes on the connected taxable income that is allocated to other foreign entities or partnerships they share business with. Under Internal Revenue Code “IRC” Section 1446, a partnership of this sort may be made up of any kind of foreign corporation, international organization, non-resident individual or foreign estate or trust. Any partnership that falls under the definition of 1446 must pay the required withheld taxes mandated by the IRS.
Withholding Tax Form 8813
The amount of withholding tax a partnership must maintain is based on its taxable income that is allotted to all of its foreign partnerships annually. Form 8813 is used to make payments of withheld taxes to the United States Treasury. The amount of the withheld tax varies upon the foreign partner’s distributive share of the partnership’s gross effectively income, which is deducted by the partner’s distributive share of partnership deductions for that year. The withholding tax rate on a partner’s share of effectively connected income is 35% for a partner taxed as a corporation and 38.6% for all other partnerships, including individuals, trusts and estates. In order to fill out form 8813, a partnership must first obtain an EIN number, if the partnership does not have an EIN at the time, simply because they filed but have not yet received one, they have the option of disclosing that on the form when filing. However, failure to provide an EIN can delay the processing of the payment on behalf of the partners.
When to File?
Generally, Form 8813 must be filed on or before the 15th day of the 4th, 6th, 9th, and 12th month of the partnerships annual tax year for U.S. income tax purposes.