Although a U.S. partnership does not pay U.S. income tax, the partnership issues a Schedule K-1 to each partner annually to report the partners’ share of net income, loss, credits and other items. The foreign partners report these items on their individual U.S. Nonresident Alien Income Tax Return, Form 1040-NR.
A situation frequently arises when a U.S. partnership sells U.S. real property. Assuming no other income, expenses, deductions or credits, sales of U.S. real property are subject to U.S. income tax when sold at a gain. When the U.S. real property is held in a U.S. partnership with foreign partners, this gain is passed through to the foreign partners, and the foreign partners report this gain on their individual U.S. Nonresident Alien Income Tax Return, Form 1040-NR.
In Addition, the U.S. partnership generally needs to make a withholding tax payment on behalf of the foreign partners on Form 8813. The foreign partners when filing their Form 1040-NR will then take a credit for the tax paid on their behalf by the partnership against any tax due on their share of the gain on the sale of the U.S. real property.
The amount of the withholding tax is the applicable percentage of the ECTI ( Effectively Connected Taxable Income) that is allocable to the foreign partners and depends on the corporate or noncorporate status of the foreign partner. For this purpose, the applicable percentage is the highest U.S. tax rate to which each foreign partner is subject.
The Form 8813 is to be filed on or before the 15th day of the 4th, 6th, 9th, and 12th months of the partnership’s tax year for U.S. income tax purposes. For a calendar year partnership, this is the 15th day of April, June, September and December. If, for example, the property is sold on May 1, the payment and Form 8813 should be filed by June 15. Generally, the U.S. partnership must notify each foreign partner of the withholding tax paid on the partner’s behalf within 10 days of making the quarterly payment.
Therefore, it is the U.S. partnership’s obligation to compute the gain on the sale of the U.S. real property in a timely manner, compute the withholding tax, and remit to IRS in a timely fashion based on the aforementioned due dates.
Additionally, the partnership will need to file Form 8804, Annual Return for Partnership Withholding Tax (Section 1446), and Form 8805, Foreign Partner’s Information Statement of Section 1446 Withholding Tax.
If the withholding payments and filings mentioned above are not completed in a timely manner, the IRS will assess penalties and interest which may be substantial.
Fonte: Mitchell Mossman, CPA, CGMA, MBA – Mossman Advisory Group, LLC