Sec. 1446 withholding.

• Author: Cauley, Christopher S.

Foreign investment in the United States continues to rise. The investment vehicle of choice, especially in the case of real estate, is generally a tax-transparent entity such as a limited partnership, limited liability company, or similar foreign transparent entity that is treated as a partnership for U.S. tax purposes. Consequently, tax practitioners need to be aware of the special withholding rules applicable to partnerships with foreign partners.

A foreign or domestic partnership that has U.S. effectively connected taxable income (ECTI) allocated to a foreign partner must withhold and pay U.S. tax under Sec. 1446. To comply with this requirement, the partnership must determine whether it has any foreign partners, determine the partnership's ECTI allocable to each foreign partner, compute the Sec. 1446 tax with respect to each foreign partner, determine when the tax should be paid, and report the amounts paid.

Determining Whether a Partnership Has a Foreign Partner

The Sec. 1446 tax applies only if the partnership has at least one foreign partner during the partnership's tax year. Therefore, the partnership must first determine whether or not it has a foreign partner, which is generally the case if the partner is a nonresident alien, foreign partnership, foreign corporation, foreign estate or trust, or other foreign person. A partner treated as a U.S. person for all income tax purposes is not a foreign partner. (See Pegs. Sec. 1.1446-1(c)(1).)

A partnership must generally determine whether a partner is a foreign partner, and the partner's tax classification (e.g., corporate or noncorporate), by obtaining a withholding certificate from the partner. A partner that is a U.S. person must provide a valid Form W-9, Request for Taxpayer Identification Number and Certification. A partner that is not a U.S. person must provide a valid Form W-8 (e.g., Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding). An entity that is disregarded as an entity separate from its owner does not submit Forms W-8 or W-9. Instead, the owner of such entity for federal tax purposes must submit appropriate documentation.

A partnership may rely on a valid Form W-8 or Form W-9 from a partner to determine whether that person is a foreign or nonforeign partner for purposes of computing the Sec. 1446 tax.

A partnership may not rely on Form W8 or Form W-9 if it has actual knowledge or reason to know that any information on the...