A foreign partnership formed outside the U.S. with foreign partners may still be subject to U.S. tax reporting and withholding obligations if it generates income that is effectively connected with a U.S. trade or business. The partnership should file a U.S. income tax return (Form 1065) and report effectively connected income (ECI) allocated to foreign partners on Form 8805.  Each foreign partner would then receive Form 8805 on Foreign Partner’s Information Statement of Section 1446 Withholding Tax. This form shows the amount of U.S. federal tax withheld and remitted on foreign partner’s behalf.  It is also required to withhold under IRC §1446(a) and submit Form 8813 payments.

The partnership is required to file Form 8804 on Annual Information for Partnership Withholding Tax (Section 1446) with the IRS. These returns should be filed to the IRS on or before the 15th day of the third month following the closure of the partnerships’ tax year.

Even though the partnership is foreign, U.S. tax rules apply to ECI from U.S. sources, and compliance is critical to avoid penalties and ensure proper crediting of U.S. taxes to the partners.

Earlier, we discussed partnership obligations. Now, let’s examine the U.S. tax obligations of partners.