Tax Traps for U.S. Partnerships With Foreign Partners: Distributions, Sale of Interests, Withholding and Reporting

U.S. partnerships with foreign partners are subject to a complex set of tax laws and treaties. Potential tax issues stem from partnership distributions, additional withholding and reporting obligations, and transfers of interest. Tax counsel and advisers must grasp a complete understanding of these rules and implement tax planning techniques to minimize unintended tax liability for both the U.S. partnership and foreign partner.

Foreign entities and individuals investing in partnerships located in the U.S. or selling their interest in these partnerships are subject to a variety of tax implications. Under IRC Section 1446(a), a partnership that has income that is effectively connected with a U.S. trade or business must pay a withholding tax on the effectively connected income allocable to its foreign partners. Failure to do so can result in penalties and tax liability for the partnership in addition to the foreign partner's U.S. tax liability.

Furthermore, IRC Sections 871(a) and 881(a) impose a tax on fixed and determinable annual or periodical (FDAP) income received from sources within the U.S. by nonresident aliens. For purposes of FDAP, U.S. partnerships must deduct and withhold such tax, which can be difficult for tiered partnership structures.

For sales of a foreign partner's interest, IRC Sections 1446(f) and 864(c)(8) require the transferee to withhold, report, and pay taxes on the amount realized by the foreign partner upon disposition of their partnership interest. This requirement has limited exceptions and adds a layer of compliance issues for foreign partners and U.S. partnerships.

Listen as our panel provides an in-depth analysis of the tax challenges of U.S. partnerships with foreign partners and offers tax planning techniques and best practices for tax counsel and advisers.

1. Overview of key tax issues
2. Issues for tiered partnerships
3. Distributions and transfers of interest
4. Estate planning issues
5. Withholding and reporting
6. Use of income tax treaties

The panel will review these and other key issues:

• What are the key tax challenges for U.S. partnerships with foreign partners?
• What issues arise when making distributions to foreign partners?
• How are transfers of foreign partners' interest treated under current U.S. tax law?
• What are the key estate planning issues?
• What are the withholding and reporting requirements for both the U.S. partnership and foreign partner?
• What issues arise for tiered partnerships?
• How can income tax treaties be used by foreign partners?
• What are the tax traps to avoid and best practices for tax counsel and advisers?

Learning Objectives

After completing this course, you will be able to:

• Identify key tax issues for U.S. partnerships with non-U.S. partners
• Recognize the tax implications of U.S. partnerships making distributions to foreign partners
• Ascertain methods to minimize the tax liability of transfers of non-U.S. partners' interest treated under current U.S. tax law
• Understand the withholding and reporting requirements for both the U.S. partnership and foreign partner
• Ascertain how income tax treaties are used by foreign partners

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years plus business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of foreign information reporting requirements and ownership attribution rules; familiarity with foreign partnership structures and identifying foreign-source income. The webinar assumes attendee already has indepth knowledge of the rules for determining effectively-connected income, as well as a working understanding of how foreign tax treaties work.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).