FROM THE OFFICE OF PUBLIC AFFAIRS

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Today, the Treasury Department and the IRS issued proposed regulations that provide guidance on the withholding tax obligation of partnerships that have one or more foreign partners and that are engaged in a U.S. trade or business.  A foreign person that conducts a trade or business in the United States generally is subject to U.S. tax on the income that is effectively connected with that trade or business.  Similar rules apply to income earned by a foreign person through a partnership that is engaged in a U.S. trade or business.  To ensure collection of the tax owed by the foreign partner, section 1446 of the Internal Revenue Code requires a partnership that is engaged in a U.S. trade or business to withhold and pay over tax to the extent that its net income that is effectively connected with its U.S. trade or business is allocable to a foreign partner.  The amount of the tax due is computed by applying the highest marginal income tax rate to the amount of the partnership’s effectively connected income that is allocable to its foreign partners.

The proposed regulations issued today update and elaborate on guidance currently provided in Revenue Procedure 89-31 (as modified by Revenue Procedure 92-66) concerning a partnership’s obligation to withhold tax on the income allocated to its foreign partners.  The proposed regulations provide guidance on the information a partnership may rely on in determining if its partners are foreign partners, the computation of the tax due, and the payment of the tax on a quarterly basis in the case of estimated tax payments.  The proposed regulations also provide rules on reporting the amount of tax withheld for direct and indirect foreign partners.  In addition, the proposed regulations provide special rules regarding the withholding tax obligation for partnerships that are publicly traded.  The proposed regulations generally are consistent with the rules in Revenue Procedures 89-31 and 92-66 and will replace those revenue procedures when the proposed regulations are finalized. 

Related Documents:

• The text of the proposed regulations