LLCs with Foreign Members
Editor’s Note – This article assumes that the LLC is treated as an LLC for U.S. tax purposes. An LLC electing to be treated as a corporation will have different concerns.
In addition to the filing of Form 1065 (U.S. Return of Partnership Income) an LLC with foreign members could be responsible for complying with other filing requirements such as Foreign Investment in Real Property Tax Act of 1980 (FIRPTA), Partnership Withholding, and Nonresident Alien Withholding.
If an LLC acquires a U.S. real property interest from a foreign person, the LLC may have to withhold tax under IRC section 1445 (FIRPTA) on the amount it pays for the property. If an LLC has income effectively connected with a trade or business in the United States, it must withhold on the income allocable to its foreign partners (Partnership Withholding). An LLC may have to withhold tax on a foreign partner’s distributive share of fixed or determinable annual or periodical gains and income (FDAP income) not effectively connected with a U.S. trade or business, as well as withhold on any other FDAP income paid to a foreign person regardless of whether he is a partner or not (NRA Withholding).
Partnership Withholding and FIRPTA
A domestic partnership that is otherwise subject to the withholding requirements of IRC sections 1445 ( FIRPTA) and 1446 (partnership withholding) will be subject to the payment and reporting requirements of IRC section 1446 only and not IRC section 1445 with respect to partnership gain from the disposition of a U.S. real property interest. An LLC that has complied with the requirements of IRC section 1446 will be deemed to satisfy the withholding requirements for FIRPTA. However, a domestic partnership that would otherwise be exempt from IRC section 1445 withholding by operation of a nonrecognition provision must continue to comply with the FIRPTA requirements (see Treasury Regulation section 1.1445-5(b)(2)). In the event that amounts are withheld under FIRPTA at the time of the disposition of a U.S. real property interest, such amounts may be credited against the partnership’s 1446 tax. An LLC that fails to comply fully with the requirements of IRC section 1446 may be liable for any unpaid 1446 tax and subject to any applicable addition to the tax, interest, and penalties under IRC section 1446. A foreign partnership that is subject to withholding under IRC section 1445(a) (FIRPTA) during its taxable year may credit the amount withheld under IRC section 1445(a) against its IRC section 1446 tax liability for that taxable year only to the extent such amount is allocable to foreign partners. Refer to Treasury Regulation section 1.1446-4(f)(4) for rules coordinating the withholding liability of publicly traded partnerships under IRC sections 1445 and 1446.
It is important to note that if during an LLC’s tax year the LLC has taxable income effectively connected with the conduct of a trade or business within the United States that is allocable to a foreign partner, the Internal Revenue Code requires the partnership to report and pay a withholding tax under IRC Section 1446 to the IRS. The partnership must pay the IRC section 1446 withholding tax regardless of the amount of foreign partners’ ultimate U.S. tax liability and regardless of whether the partnership makes any distributions during its tax year. Revenue Procedure 92-66, and Treasury Regulation section 1.1446-3 set forth the time and manner for paying the withholding tax, as well as the general reporting obligations with respect to the tax. Refer to Forms 8804, Annual Return for Partnership Withholding Tax (Section 1446), 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax, and 8813, Partnership Withholding Tax Payment Voucher (Section 1446), for further guidance on reporting and paying the IRC section 1446 withholding tax. An LLC that fails to comply with IRC section 1446 reporting and withholding requirements may be subject to penalties and interest.
The LLC may reduce the foreign partner’s share of the LLC’s gross effectively connected income by certain partner level deductions and losses if the foreign partner certifies these losses on Form 8804-C (see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for additional information).
Special rules apply to publicly traded partnerships. Publicly traded partnerships (within the meaning of Rev. Proc. 89-31) must file Forms 8804 (PDF), 8805 (PDF), and 8813 (PDF) only if they have elected to pay IRC section 1446 withholding tax based on effectively connected taxable income allocable to its foreign partners. For more information about the rules applicable to publicly traded partnerships see Revenue Procedure 92-66.
Are You Paying Your Installment Payments Properly?
When you pay the withholding tax required under IRC section 1446 carefully follow the guidance provided in Instructions for Forms 8804, 8805, and 8813 (PDF).
Use Form 8813, Partnership Withholding Tax Payment Voucher (Section 1446), to pay quarterly installments of withholding tax under IRC section 1446 to the United States Treasury. A Form 8813 must accompany each payment of IRC section 1446 tax made during the LLC’s tax year.
File Form 8813 on or before the 15th day of the 4th, 6th, 9th, and 12th months of the LLC’s tax year for U.S. income tax purposes.
Mail the voucher with a check or money order in U.S. currency payable to the “United States Treasury.” Write the LLC’s Employer Identification Number, tax year, and “Form 8813” on the check or money order.
File Form 8813 with:
Internal Revenue Service Center
P.O. Box 409101
Ogden UT 84409
Generally, pay any additional amounts due when filing Form 8804. However, if the LLC files Form 2758 to request an extension of time to file Form 8804, pay the balance of IRC section 1446 withholding tax estimated to be due with Form 2758. The use of Form 2758 does not automatically extend the time for payment of the tax due.
Filing in accordance with the instructions will insure the payments are credited to the proper account.
The submission of a payment on Form 8813 does not totally satisfy the LLC’s responsibility for filing. In addition, the LLC must file Form 8804 with the IRS and Form 8805 with the IRS and the foreign partner after the end of the LLC’s calendar or fiscal year.
Nonresident Aliens Withholding
In addition to the requirement to withhold under IRC section 1446, U.S. source income that is not effectively connected with the LLC’s U. S. trade or business may be subject to withholding as required under IRC sections 1441, 1442, and 1443. Report this type of withholding on Form 1042 (PDF) and Form(s) 1042-S(PDF). Refer to Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, and to the Instructions for Form 1042-S (PDF).
Is It Time to Update Foreign Partners’ U.S. TINs’?
In order for a foreign partner to claim a refund a valid Taxpayer Identification Number (TIN) is required. A foreign partner must file an income tax return (Form 1040NR, Form 1120F, etc.) with a valid TIN.
Are Your Foreign Partners Aware of This?
This is especially important with respect to partnership withholding. A foreign or domestic partnership that has effectively connected taxable income allocable to a foreign partner must pay a withholding tax under IRC section 1446 equal to the applicable percentage of the effectively connected taxable income that is allocable to its foreign partners. An LLC must pay the withholding tax for a foreign partner even if the LLC does not have a U.S. TIN for that partner.
Foreign partners must attach Form 8805 to their U.S. income tax returns to claim a credit for their share of the IRC section 1446 tax withheld by the LLC. To insure proper crediting of the withholding tax when reporting to the IRS, an LLC must provide a U.S. taxpayer identification number (TIN) for each foreign partner. The LLC should notify any of its foreign partners without a valid TIN of the necessity of obtaining a U.S. taxpayer identification number. An individual’s taxpayer identification number is the individual’s social security number (SSN) or individual taxpayer identification number (ITIN). An ITIN will always begin with a 9, and the middle two digits will be in the range of 70 to 80. It is also possible that a partner’s TIN could be its U.S. employer identification number (EIN).
NOTE: Certain aliens who cannot obtain SSNs can now apply for ITINs on Form W-7, Application for IRS Individual Taxpayer Identification Number.
LLCs should review their files and/or contact their foreign partners to verify that each foreign partner has a valid TIN.
Forms 8804 (PDF), 8805 (PDF), 8813 (PDF) and Form 8804, 8805, 8813 Instructions (PDF)
Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, Section on Partnership Withholding on Effectively Connected Income
Revenue Procedure 89-31
Revenue Procedure 92-66
Internal Revenue Code section 1446
Internal Revenue Regulations under Section 1446
Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
Source: Internal Revenue Service
Last reviewed or updated: March 12, 2014