If a partnership with a foreign partner has income that is effectively connected with a US business or trade, it is required to report a partnership withholding tax. This is done by filing Form 8805 and Form 8804.
This is a somewhat complicated area of US tax law, but don’t worry! We’re here to help you understand how partnership withholding on foreign partners works.
What Is Partnership Withholding?
If a nonresident alien is a partner in a US partnership—or a foreign partnership with effectively connected income (ECI) to a US business of trade—then that partnership must withhold on the foreign partner’s share of the ECI.
(This also applies to LLCs that are taxed as a partnership, whether domestic or foreign.)
Partnerships must pay this withholding tax even if the partnership never makes any cash distributions to the foreign partner, and regardless of the foreign partners’ ultimate US tax liability.
The good news is that the withholding tax does not apply to any income that isn’t effectively connected to a US business or trade.
What Is the Withholding Rate for Partnerships with a Foreign Partner?
The standard withholding rates are:
- 35% for corporate foreign partners
- 39.6% for non-corporate foreign partners
However, because the US has entered into tax treaties with some countries, the rate may be lower for some foreign partners. An experienced expat accountant will be able to help you calculate the correct rate for your business.
Are There Any Exceptions?
The IRS lets foreign partners certify some losses and deductions to the partnership. Foreign partners may also certify that their partnership investment will be the only way they contribute to the ECI during that tax year.
In the event of these certifications, the partnership won’t be required to pay a withholding tax for the foreign partner as long as the estimated annualized or actual tax due is less than $1,000.
However, even if no withholding tax is due, the partnership must still report the ECI income of the foreign partner. You can do this with Form 8805 and Form 8804.
What Is Form 8805?
Form 8805 is used to report the amount of ECI allocated to a foreign partner. The partnership must send a completed copy of this form to all foreign partners involved, even if no withholding tax is paid.
If a withholding tax is paid, the foreign partner can then attach Form 8805 to their US individual tax return to claim a credit for their share of income that was withheld.
What Is Form 8804?
Form 8804 is an annual summary statement of any Forms 8805 that were sent to foreign partners. The partnership must complete Form 8804 and attach a copy of every foreign partner’s 8805—again, even if no withholding tax is paid.
When Are These Forms Due?
Most partnerships must send copies of Form 8805 to every foreign partner no later than April 15th. The same deadline applies for filing Form 8804 and duplicate copies of every Form 8805 with the IRS.
However, if the partnership is exclusively made up of foreign partners, the deadline for both forms is June 15th instead.
If you aren’t able to file on time, you can use Form 7004 to request an extension. Just remember that this only extends the deadline for filing, not the deadline for paying the withholding tax.
Since many other small business tax deadlines fall on the same dates, it’s important to plan ahead when filing Form 8805 and Form 8804.
What If the Partnership Doesn’t File These Forms on Time?
The IRS mandates various penalties for failing to file these forms or filing them too late.
If a partnership fails to file Form 8804 by the deadline, the IRS will typically apply a penalty of 5% of any unpaid withholding taxes for each month (or part of a month) that have passed since the deadline, up to a maximum of 25% of the unpaid taxes. And if the partnership files Form 8804 more than 60 days late, the minimum penalty will be $330, unless the total amount owed is less than that.
What about Form 8805? If a partnership fails to:
- Send copies of Form 8805 to its foreign partners
- File duplicate copies with the IRS
- Provide complete and accurate information on each Form 8805
…they may be subject to a penalty. The penalty generally ranges from $50–$280 per Form 8805, up to a maximum penalty of $3,392,000.
However, in any of these cases, you may be able to avoid all penalties if you can show reasonable cause for filing late.
For more information, see here for the combined Form 8804 and Form 8805 instructions.
How Do I File Form 8805 and Form 8804?
Form 8805 is similar to Forms W-2 or 1099-MISC. All it requires is some identifying information about the partnership and the foreign partner in question. Then, you’ll fill in the amount of tax the partnership withheld from the foreign’ partners ECI.
Form 8804 is more like Forms W-3 or 1096. It merely summarizes the amounts withheld from each foreign partner. But remember: You must attach a copy of Form 8805 for every foreign partner, regardless of whether any withholding tax is paid.
Again, review the combined Form 8805 and Form 8804 instructions for more details.
If you do owe any withholding taxes for a foreign partner, these must be paid using Form 8813. These payments must be made quarterly through the tax year, on the 15th day of April, June, September, and December.
To learn more about the laws surrounding these forms, review IRC section 1446.
Get Help From an Experienced Expat Accountant
We hope this article has cleared up any confusion you may have had about Forms 8805 and 8804. Nevertheless, understanding US tax requirements for foreign businesses can be tricky.
If you have questions, we’d be happy to answer them. Just contact us, and we’ll help you in any way we can.
Ready to file your expat taxes? If so, we’re ready to take the hassle off your hands. At Greenback Expat Tax Services, we help expats file their taxes on time and correctly. Better yet, we’ll optimize your tax strategy so you don’t end up paying more than you actually owe.