United States: IRS issues guidance on 2012 withholding by partnerships with foreign partners

May 3, 2013

The US Internal Revenue Service (IRS) has issued IRS Announcement 2013-30 with guidance for partnerships that are required to withhold US tax on effectively connected taxable income (ECTI) allocable to their foreign partners under section 1446 of the US Internal Revenue Code (IRC).

Under IRC section 1446, foreign partners (i.e., non-resident individuals and foreign corporations) are subject to US withholding tax on their allocable share of the ECTI of a partnership that is engaged in a trade or business in the United States. The withholding tax is collected by the partnership.

The withholding tax is imposed at the highest income tax rate applicable to the foreign partner (i.e., the highest individual tax rate or highest corporate tax rate). The tax withheld is not the final US tax liability, and can be claimed as a credit on the regular US income tax return filed by the foreign partner.

Announcement 2013-30 provides that, for partnerships with taxable years beginning in 2012, the partnership should withhold tax under IRC section 1446 at the rates in effect in 2012 (i.e., 35% for both corporations and individuals).

For that purpose, such partnerships are required to file 2012 IRS Form 8804 (Annual Return for Partnership Withholding Tax (Section 1446)).

Announcement 2013-30 further provides that foreign partners nonetheless must pay US income tax on their allocable share of the partnership’s ECTI, based on the income tax rates in effect in the taxable year that the partnership income is included on their own returns, as determined under the rules of IRC section 706(a).


icon ©copyright IBFD. This article is part of a selection of daily news from the IBFD Tax News Service (TNS) chosen by EY professionals. All rights to the content reside with IBFD. Any use requires IBFD’s prior permission in writing. IBFD´s disclaimer applies to any and all of IBFD’s articles and publications.
EY refers to one or more of the member firms of Ernst & Young Global Limited (EYG), a UK private company limited by guarantee. EYG is the principal governance entity of the global EY organization and does not provide any service to clients. Services are provided by EYG member firms. Each of EYG and its member firms is a separate legal entity and has no liability for another such entity's acts or omissions. Certain content on this site may have been prepared by one or more EYG member firms.