Do we have to withhold if the partnership made no distributions?
Yes, and this is the point on which partnerships most often get caught. The withholding attaches to income effectively connected with the US business as it is allocated to a foreign partner, not to cash going out of the door. A partnership that allocates profit and retains every dollar of it has the same obligation as one that distributes, and has to find the money to satisfy it from working capital. Partners see the consequence too: a foreign partner can face US withholding on profits that never reached them. Plan for the cash cost at the point the allocation is made.
Who is on the hook, the partnership or the foreign partner?
The partnership. The obligation to withhold and to file is the partnership's own, and if it does not withhold it carries the liability, which is a materially different position from an agent who has merely failed to collect. The foreign partner's interest is different. They need the per-partner statement, because that is what lets them credit the amount withheld against their own US tax on the same income. So one side owes the money and the other side needs the paperwork, and a partnership that forgets the second half creates a problem for its partners even when it has paid on time.
We are a foreign partnership with US income, does this apply?
It can. The obligation turns on two facts rather than on where the partnership was formed: that it has income effectively connected with a US business, and that some of that income is allocated to a foreign partner. A partnership organised outside the United States meets those tests as readily as a domestic one. The mistake we see in this fact pattern is the assumption that a foreign partnership sits outside the US filing system altogether, or that responsibility falls to whichever partners happen to be American. Establish the facts about the income and the partners, then work out the obligation.
My partnership sent me Form 8805, what do I do with it?
Keep it and use it on your own US return. It is the statement of what the partnership withheld on the income allocated to you, and it is what lets you claim credit for that amount against the tax on the same income. Two things are worth checking when it arrives. That your name and taxpayer identifier are as they appear on your own filings, because a mismatch stops the credit being traced to you. And that the income figure matches the allocation you were told about, particularly if you received no cash, because that is the situation in which the paperwork and your expectations most often diverge.
How do we know whether a partner counts as foreign?
You establish it and you keep the evidence, because the obligation turns on that status and the partnership carries the consequence of getting it wrong. Ask for each partner's status documentation when they are admitted, record what you were given, and return to it when circumstances change, since a partner's residence position is not fixed for the life of the partnership. Where interests are held through nominees or other entities, look through to who the partner actually is rather than to whose name is on the register. A partnership that cannot show why it treated a partner as domestic is in a weak position later.
Our foreign partner has a tiny stake, does that change anything?
Not the obligation. The question is whether there is a foreign partner and whether income effectively connected with a US business is allocated to them, not how large the interest is. Small interests are in fact a common source of failures here, because they are the ones a partnership forgets when it thinks of itself as a domestic business with one minor outside investor. Size affects the amount, the administrative effort and the cash cost, none of which is nothing. It does not affect whether the withholding return and the per-partner statement have to be prepared.
What does Form W-8BEN actually do?
It tells a US payer that you are not a US person and, where you are entitled, claims the treaty rate on the income they are about to pay you — so withholding comes off at the reduced rate rather than the statutory one. It goes to the payer or the broker, never to the IRS, and it expires, so a stale form is a common cause of over-withholding. Getting it in before payment is the difference between a lower rate and a refund claim. See Form W-8BEN.
Do I pay tax twice on a foreign dividend?
Not at full rates if the relief is claimed. The paying country usually withholds at source, capped by treaty where one applies and the paperwork is in place; your residence country then taxes the dividend and credits the foreign withholding against its own charge. Where the withholding exceeded the treaty rate because no declaration was filed, the excess is recovered from the paying country, not credited at home. See the dividends article.
