Compliance requirements for foreign partnerships.

• Author: Berk, Nancy L.
• Position: Taxation

The recently issued proposed regulations on return requirements shift the compliance burden from a partnership to its partners for foreign partnerships not engaged in a trade or business in the U.S. When the regulations are issued in final form, the tax return filing requirement for U.S. partners in foreign partnerships will parallel those for U.S. shareholders in controlled foreign corporations (CFCs).

TEFRA

The U.S. filing requirements for foreign partnerships have never had a definitive set of rules. In 1982, the Tax Equity and Fiscal Responsibility Act (TEFRA) amended the Code, requiring partnerships to furnish to every U.S. person, who was a partner in that partnership at any time during the tax year, a copy of the information on the partnership return to the extent required by the regulations.

1986 Regulations

Regulations proposed in 1986 provided a filing exception for a foreign partnership, without any income from sources within the U.S., that did not conduct a business in the U.S., with the exception of a partnership in which a U.S. person held an interest (directly or indirectly) in the partnership of 25% or more of any item of income, gain, loss, deduction or credit.

TRA '97

The Taxpayer Relief Act of 1997 (TRA '97) modified the filing requirements for foreign partnerships; a foreign partnership must file a partnership return for any tax year that it engages in a U.S. trade or business or has U.S.-source income. Otherwise, reporting rules similar to those applicable to CFCs apply to foreign partnerships. In that circumstance, a U.S. partner who controls a foreign partnership must file an annual information return. A U.S. partner controls a foreign partnership if the partner holds a more-than-50% interest in the partnership's capital, profits or (to the extent provided in the regulations) losses. A U.S. 10% partner of a foreign partnership controlled by U.S. 10% partners requires similar reporting. Failing to comply with the reporting requirements results in a $10,000 penalty; additional penalties of up to $50,000 apply when noncompliance continues after notification.

A U.S. person involved in an acquisition or disposition of a foreign partnership interest (or a change in that person's proportional interest) must report acquisitions, dispositions or changes involving at least a 10% interest. Failing to comply with these reporting requirements results in a $10,000 penalty; additional penalties of up to $50,000 apply when...