Recalde Law Firm, P.A. is a Florida law firm with an office in Miami, Florida. We advise on United States law only. We do not practice Mexican law, and we do not give Mexican tax or succession advice. We do not practice the law of any other country. Formation of a non-U.S. entity, and the local law of that jurisdiction, are matters for local counsel. We handle the U.S. architecture: classification, the documents a U.S. custodian and a U.S. court will read, and coordination with the family's tax adviser.
A partnership that has a foreign partner can have a withholding obligation at the partnership level, even when the partners think of tax as something each partner files alone. Section 1446(a) is the regime for effectively connected taxable income allocable to a foreign partner. Section 1446(f) is the regime for withholding when a partnership interest is transferred and gain on the sale is treated as effectively connected under section 864(c)(8). This note is those two regimes in general terms. It is not tax advice, and it is not a description of any client's joint venture.
The holding structure that often produces the question is on holding structures for U.S. investments. The wider engagement is Private Wealth.
Why the partnership, not only the partner, has a duty
Section 1446(a) requires a partnership to pay a withholding tax on effectively connected taxable income that is allocable to a foreign partner. The partnership withholds whether or not cash is distributed. A U.S. limited liability company or limited partnership classified as a partnership, with a member or partner who is not a U.S. person, is the ordinary case. The foreign partner may be an individual or a foreign trust or a foreign company. Families from Mexico, Brazil, or Colombia appear as that partner. Families from Argentina, Ecuador, or Chile appear the same way. Their home-country treatment of the allocation is for home-country counsel. The withholding is a U.S. partnership obligation.
The annual reporting of that withholding is on Forms 8804 and 8805, and deposits during the year are made on the form the instructions specify, generally Form 8813. We do not restate the rates or the deposit calendar. Both move, and both are the tax adviser's to apply to the year's income. A partner's credit for the amount withheld is claimed on the partner's own return. The partnership's failure to withhold is not cured by the partner's intention to file.
A transfer of the interest
Section 1446(f) requires withholding on the transfer of a partnership interest if any of the gain would be treated as effectively connected gain. The buyer, or in defined cases the partnership itself, is the withholding agent. A redemption, a secondary sale, and a distribution of money in exchange for an interest can each be a transfer. The exceptions and certifications are in the regulations and the form instructions. They are not a default. Assuming "the partnership is foreign, so 1446 does not apply," or "the partner is a trust, so the partnership has nothing to withhold," is how the file arrives late. Whether the partnership is engaged in a U.S. trade or business, and whether the interest is in a partnership that has effectively connected income, are facts. We identify them with the tax adviser. We do not compute the withholding on this page.
Classification first
Section 1446 applies to a partnership. An entity that elected, or defaulted into, corporate classification is in a different regime. An entity everyone calls a partnership, and that Form 8832 would treat as a corporation, will be analyzed as what it is. See the Form 8832 election. The firm assigns responsibility for the classification. The tax adviser prepares the returns and the withholding forms.
If a foreign trust is the partner, the trust's own reporting sits beside the partnership's. See Foreign Trusts and the annual reporting calendar. Nothing on this page is a plan to reduce withholding by rearranging names. If the partner is foreign and the income is effectively connected, the partnership's obligation is the starting point.