When a U.S. partnership generates income that is effectively connected with a U.S. trade or business, it should report each foreign partner’s distributive share of that effectively connected income (ECI) on Schedule K-1 (Form 1065) and Form 8805.

Additionally, the partnership is required to withhold tax under IRC §1446 at the highest applicable rate on the ECI allocable to each foreign partner, regardless of whether actual distributions are made. The withheld tax should be reported and paid using Form 8813. The partnership is required to submit Form 8804, “Annual Information for Partnership Withholding Tax” to the IRS.  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. These returns are due to be filed to the IRS on or before the 15th day of the third month following the close of the partnership’s tax year.

Failure to comply may result in penalties for both underreporting and under-withholding.

Next, let’s examine the U.S. tax obligations of foreign partnerships with foreign partners.