§1446 — Withholding of tax on foreign partners’ share of effectively connected income

Statute Text — 26 U.S.C. §1446

Treasury Regulations

• Treas. Reg. §1.1446-0Table of contents Show full text ▾ Collapse ▴

  This section lists the captions contained in §§ 1.1446-1 through 1.1446-7.

  (a) In general.

  (b) Steps in determining 1446 tax obligation.

  (c) Determining whether a partnership has a foreign partner.

  (1) In general.

  (2) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9.

  (i) In general.

  (ii) Withholding certificate applicable to each type of partner.

  (A) U.S. person.

  (B) Nonresident alien.

  (C) Foreign partnership.

  (D) Disregarded entities.

  (E) Domestic and foreign grantor trusts.

  (F) Nominees.

  (G) Foreign governments, foreign tax-exempt organizations and other foreign persons.

  (H) Foreign corporations, certain foreign trusts, and foreign estates.

  (iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and statement.

  (A) Partnership reliance on withholding certificate.

  (B) Reason to know.

  (C) Subsequent knowledge and impact on penalties.

  (iv) Requirements for certificates to be valid.

  (A) When period of validity expires.

  (B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP.

  (v) Partner must provide new withholding certificate when there is a change in circumstances.

  (vi) Partnership must retain withholding certificates.

  (3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement.

  (4) Consequences when partnership knows or has reason to know that Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is incorrect or unreliable and does not withhold.

  (5) Acceptable substitute form.

  (a) In general.

  (b) Computation.

  (1) In general.

  (2) Income and gain rules.

  (i) Application of the principles of section 864.

  (ii) Income treated as effectively connected.

  (iii) Exempt income.

  (3) Deductions and losses.

  (i) Oil and gas interests.

  (ii) Charitable contributions.

  (iii) Net operating losses and other suspended or carried losses.

  (iv) Interest deductions.

  (v) Limitation on capital losses.

  (vi) Other deductions.

  (vii) Limitations on deductions.

  (4) Other rules.

  (i) Exclusion of items allocated to U.S. partners.

  (ii) Partnership credits.

  (5) Examples.

  (a) In general.

  (1) Calculating 1446 tax.

  (2) Applicable percentage.

  (i) In general.

  (ii) Special types of income or gain.

  (b) Installment payments.

  (1) In general.

  (2) Calculation.

  (i) General application of the principles of section 6655.

  (ii) Annualization methods.

  (iii) Partner's estimated tax payments.

  (iv) Partner whose interest terminates during the partnership's taxable year.

  (v) Exceptions and modifications to the application of the principles under section 6655.

  (A) Inapplicability of special rules for large corporations.

  (B) Inapplicability of special rules regarding early refunds.

  (C) Period of underpayment.

  (D) Other taxes.

  (E) 1446 tax treated as tax under section 11.

  (F) Application of section 6655(f).

  (G) Application of section 6655(i).

  (H) Current year tax safe harbor.

  (I) Prior year tax safe harbor.

  (3) 1446 tax safe harbor.

  (i) In general.

  (ii) Permission to change to standard annualization method.

  (c) Coordination with other withholding rules.

  (1) Fixed or determinable, annual or periodical income.

  (2) Real property gains.

  (i) Domestic partnerships.

  (ii) Foreign partnerships.

  (3) Coordination with section 1443.

  (4) Coordination with section 1446(f).

  (d) Reporting and crediting the 1446 tax.

  (1) Reporting 1446 tax.

  (i) Reporting of installment tax payments and notification to partners of installment tax payments.

  (ii) Payment due dates.

  (iii) Annual return and notification to partners.

  (iv) Information provided to beneficiaries of foreign trusts and estates.

  (v) Attachments required of foreign trusts and estates.

  (vi) Attachments required of beneficiaries of foreign trusts and estates.

  (vii) Information provided to beneficiaries of foreign trusts and estates that are partners in certain publicly traded partnerships.

  (2) Crediting 1446 tax against a partner's U.S. tax liability.

  (i) In general.

  (ii) Substantiation for purposes of claiming the credit under section 33.

  (iii) Special rules for apportioning the tax credit under section 33.

  (A) Foreign trusts and estates.

  (B) Use of domestic trusts to circumvent section 1446.

  (iv) Refunds to withholding agent.

  (v) 1446 tax treated as cash distribution to partners.

  (vi) Examples.

  (e) Liability of partnership for failure to withhold.

  (1) In general.

  (2) Proof that tax liability has been satisfied and deemed payment of 1446 tax.

  (3) Liability for interest, penalties, and additions to the tax.

  (i) Partnership.

  (ii) Foreign partner.

  (4) Examples.

  (f) Effect of withholding on partner.

  (a) In general.

  (b) Definitions.

  (1) Publicly traded partnership.

  (2) Applicable percentage.

  (3) Nominee.

  (4) Qualified notice.

  (c) Paying and reporting 1446 tax.

  (d) Rules for nominees required to withhold tax under section 1446.

  (1) In general.

  (2) Exception to nominee's withholding.

  (e) Determining foreign status of partners.

  (f) Distributions subject to withholding.

  (1) In general.

  (2) In-kind distributions.

  (3) Ordering rule relating to distributions.

  (4) Coordination with section 1445(e)(1).

  (a) In general.

  (b) Reporting requirements.

  (1) In general.

  (2) Publicly traded partnerships.

  (c) Look through rules for foreign upper-tier partnerships.

  (d) Publicly traded partnerships.

  (1) Upper-tier publicly traded partnership.

  (2) Lower-tier publicly traded partnership.

  (e) Election by a domestic upper-tier partnership to apply look through rules.

  (1) In general.

  (2) Information required for valid election statement.

  (3) Consent of lower-tier partnership.

  (f) Examples.

  (a) In general.

  (1) Purpose and scope.

  (2) Reasonable reliance on a certificate.

  (b) Foreign partners to whom this section applies.

  (1) In general.

  (2) Definitions.

  (i) U.S. income tax return.

  (ii) Timely-filed.

  (iii) Qualifying U.S. income tax return.

  (3) Special rules.

  (c) Reduction of 1446 tax with respect to a foreign partner.

  (1) General rules.

  (i) Certified deductions and losses.

  (A) Deductions and losses from the partnership.

  (B) Deductions and loss from other sources.

  (C) Limit on the consideration of a partner's net operating loss deduction.

  (D) Limitation on losses subject to certain partner level limitations.

  (E) Certification of deductions and losses to other partnerships.

  (F) Partner level use of deductions and losses certified to a partnership.

  (ii) De minimis certificate for nonresident alien individual partners.

  (A) In general.

  (B) Requirements for exception.

  (iii) Consideration of certain current year state and local taxes.

  (2) Form and time of certification.

  (i) Form of certification.

  (ii) Time of certification provided to partnership.

  A) First certificate submitted for a partnership's taxable year.

  (B) Updated certificates and status updates.

  (1) Preceding year tax returns not yet filed.

  (2) Other circumstances requiring an updated certificate.

  (3) Form and content of updated certificate.

  (4) Partnership consideration of an updated certificate.

  (3) Notification to partnership when a partner's certificate cannot be relied upon.

  (4) Partner to receive copy of notice.

  (5) Notification to partnership when no foreign partner's certificate can be relied upon.

  (6) Partnership notification to partner regarding use of deductions and losses.

  (7) Partner's certificate valid only for partnership taxable year for which submitted.

  (d) Effect of certificate of deductions and losses on partner and partnership.

  (1) Effect on partner.

  (i) No effect on liability for income tax of foreign partner.

  (ii) No effect on partner's estimated tax obligations.

  (iii) No effect on partner's obligation to file U.S. income tax return.

  (2) Effect on partnership.

  (i) Reasonable reliance to relieve partnership from addition to tax under section 6665.

  (ii) Continuing liability for withholding tax under section 1461 and for applicable interest and penalties.

  (A) In general.

  (B) Certificate defective because of amount or character of deductions and losses.

  (3) Partnership level rules and requirements.

  (i) Filing requirement.

  (ii) Reasonable cause for failure to timely file a valid certificate and computation.

  (A) Determining reasonable cause.

  (B) Notification.

  (e) Examples.

  (f) Effective/Applicability date.

  (g) Transition rule.

• Treas. Reg. §1.1446-0(a)In general. Show full text ▾ Collapse ▴

  In general.

  (1) Purpose and scope.

  (2) Reasonable reliance on a certificate.

• Treas. Reg. §1.1446-0(b)Foreign partners to whom this section applies. Show full text ▾ Collapse ▴

  Foreign partners to whom this section applies.

  (1) In general.

  (2) Definitions.

• Treas. Reg. §1.1446-0(c)Reduction of 1446 tax with respect to a foreign partner. Show full text ▾ Collapse ▴

  Reduction of 1446 tax with respect to a foreign partner.

  (1) General rules.

• Treas. Reg. §1.1446-0(d)Effect of certificate of deductions and losses on partner and partnership. Show full text ▾ Collapse ▴

  Effect of certificate of deductions and losses on partner and partnership.

  (1) Effect on partner.

• Treas. Reg. §1.1446-0(e)Examples. Show full text ▾ Collapse ▴

  Examples.

• Treas. Reg. §1.1446-0(f)Effective/Applicability date. Show full text ▾ Collapse ▴

  Effective/Applicability date.

• Treas. Reg. §1.1446-0(g)Transition rule. Show full text ▾ Collapse ▴

  Transition rule.

• Treas. Reg. §1.1446-0(i)Filing requirement. Show full text ▾ Collapse ▴

  Filing requirement.

  (ii) Reasonable cause for failure to timely file a valid certificate and computation.

  (A) Determining reasonable cause.

  (B) Notification.

• Treas. Reg. §1.1446-0(v)§1.1446-0(v) Show full text ▾ Collapse ▴

  1446 tax treated as cash distribution to partners.

  (vi) Examples.

• Treas. Reg. §1.1446-1Withholding tax on foreign partners' share of effectively connected taxable income Show full text ▾ Collapse ▴

  (a) In general. If a domestic or foreign partnership has effectively connected taxable income (ECTI) as computed under § 1.1446-2 for any partnership tax year, and any portion of such taxable income is allocable under section 704 to a foreign partner, then the partnership must pay a withholding tax under section 1446 (1446 tax) at the time and in the manner prescribed in this section, and §§ 1.1446-2 through 1.1446-6.

  (b) Steps in determining 1446 tax obligation. In general, a partnership determines its 1446 tax as follows. The partnership determines whether it has any foreign partners in accordance with paragraph (c) of this section. If the partnership does not have any foreign partners (including any person presumed to be foreign under paragraph (c) of this section and any domestic trust treated as foreign under § 1.1446-3(d)) during its taxable year, it generally will not have a 1446 tax obligation. If the partnership has one or more foreign partners, it then determines under § 1.1446-2 whether it has ECTI any portion of which is allocable under section 704 to one or more of the foreign partners. If the partnership has ECTI allocable under section 704 to one or more of its foreign partners, the partnership computes its 1446 tax, pays over 1446 tax, and reports the amount paid in accordance with the rules in § 1.1446-3. For special rules applicable to publicly traded partnerships, see § 1.1446-4. For special rules applicable to tiered partnership structures, see § 1.1446-5. For special rules that may apply in determining the amount of 1446 tax due with respect to a partner, see § 1.1446-6.

  (c) Determining whether a partnership has a foreign partner—(1) In general. Except as otherwise provided in this section, § 1.1446-3, and § 1.1446-5, only a partnership that has at least one foreign partner during the partnership's taxable year can have a 1446 tax liability. Generally, the term foreign partner means any partner of the partnership that is not a U.S. person within the meaning of section 7701(a)(30). Thus, a partner of the partnership is generally a foreign partner if the partner is a nonresident alien, foreign partnership (see § 1.1446-5 for rules that allow a lower-tier partnership to look through an upper-tier foreign partnership to the partners of such partnership for purposes of computing its 1446 tax), foreign corporation (which includes a foreign government pursuant to section 892(a)(3)), foreign estate or trust (see paragraph (c)(2) of this section for rules that instruct a partnership to consider the grantor or other owner of a trust under subpart E of subchapter J as the partner for purposes of computing the partnership's 1446 tax), as those terms are defined under section 7701 and the regulations thereunder, or a foreign organization described in section 501(c), or other foreign person. A person also is a foreign partner if the person is presumed to be a foreign person under paragraph (c)(3) of this section. For purposes of this section, a partner that is treated as a U.S. person for all income tax purposes (by election or otherwise, see e.g., sections 953(d) and 1504(d)) will not be a foreign partner, provided the partner has provided the partnership a valid Form W-9, “Request for Taxpayer Identification Number and Certification,” or the partnership uses other means to determine that the partner is not a foreign partner (see paragraph (c)(3) of this section). A partner that is treated as a U.S. person only for certain specified purposes is considered a foreign partner for purposes of section 1446, and a partnership must pay 1446 tax on the portion of ECTI allocable to that partner. For example, a partnership must generally pay 1446 tax on ECTI allocable to a foreign corporate partner that has made an election under section 897(i).

  (2) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9—(i) In general. Except as otherwise provided in this paragraph (c)(2) or paragraph (c)(3) of this section, a partnership must generally determine whether a partner is a foreign partner, and the partner's tax classification (e.g., corporate or non-corporate), by obtaining a withholding certificate from the partner that is a Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding,” Form W-8IMY, “Certificate of Foreign Intermediary, Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding,” Form W-8ECI, “Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States,” Form W-8EXP, “Certificate of Foreign Government or other Foreign Organization for United States Tax Withholding,” or a Form W-9, as applicable, or an acceptable substitute form permitted under paragraph (c)(5) of this section. Generally, a foreign partner that is a nonresident alien, a foreign estate or trust (other than a grantor trust described in this paragraph (c)(2)), a foreign corporation, or a foreign government should provide a valid Form W-8BEN.

  (ii) Withholding certificate applicable to each type of partner. A partner that submits a valid Form W-8 (e.g., Form W-8BEN) for purposes of section 1441 or 1442 will generally satisfy the documentation requirements of this section provided that the submission of such form is not inconsistent with the rules of this paragraph (c)(2) or paragraph (c)(3) of this section. The following rules shall apply for purposes of this section.

  (A) U.S. person. A partner that is a U.S. person (other than a grantor trust described in this paragraph (c)(2)), including a domestic partnership and domestic simple or complex trust (including an estate), shall provide a valid Form W-9.

  (B) Nonresident alien. A Form W-8 (e.g., Form W-8BEN) submitted by a nonresident alien for purposes of withholding under section 1441 will generally be accepted for purposes of section 1446. If no such form is submitted for purposes of section 1441, such nonresident alien shall submit Form W-8BEN for purposes of section 1446.

  (C) Foreign partnership. A partner that is a foreign partnership generally shall provide a valid Form W-8IMY for purposes of section 1446. See § 1.1446-5 (permitting a lower-tier partnership to look through an upper-tier foreign partnership in certain circumstances when computing 1446 tax).

  (D) Disregarded entities. An entity that is disregarded as an entity separate from its owner under § 301.7701-3 of this chapter (whether domestic or foreign) shall not submit a Form W-8 (e.g., Form W-8BEN) or Form W-9. Instead, the owner of such entity for Federal tax purposes shall submit appropriate documentation to comply with this section. See §§ 301.7701-1 through 301.7701-3 of this chapter for determining the U.S. Federal tax classification of a partner.

  (E) Domestic and foreign grantor trusts. To the extent that a grantor or other person is treated as the owner of any portion of a trust under subpart E of subchapter J of the Internal Revenue Code, such trust shall provide documentation under this paragraph (c)(2) to identify the trust as a grantor trust and provide documentation on behalf of the grantor or other person treated as the owner of all or a portion of such trust as required by this paragraph (c)(2). If such trust is a foreign trust, the trust shall submit Form W-8IMY to the partnership identifying itself as a foreign grantor trust and shall provide such documentation (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, or W-9) and information pertaining to its grantor or other owner to the partnership that permits the partnership to reliably associate (within the meaning of § 1.1441-1(b)(2)(vii)) such portion of the trust's allocable share of partnership ECTI with the grantor or other person that is the owner of such portion of the trust. If such trust is a domestic trust, the trust shall furnish the partnership a statement under penalty of perjury that the trust is, in whole or in part, a domestic grantor trust and such statement shall identify that portion of the trust that is treated as owned by a grantor or another person under subpart E of subchapter J of the Internal Revenue Code. The trust shall also provide such documentation and information (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, or W-9) pertaining to its grantor or other owner(s) to the partnership that permits the partnership to reliably associate (within the meaning of § 1.1441-1(b)(2)(vii)) such portion of the trust's allocable share of partnership ECTI with the grantor or other person that is the owner of such portion of the trust.

  (F) Nominees. Where a nominee holds an interest in a partnership on behalf of another person, the beneficial owner of the partnership interest, not the nominee, shall submit a Form W-8 (e.g., Form W-8BEN) or Form W-9 to the partnership or nominee that is the withholding agent.

  (G) Foreign governments, foreign tax-exempt organizations and other foreign persons. A Form W-8 (e.g., Form W-8EXP) submitted by a partner that is a foreign government, foreign tax-exempt organization, or other foreign person for purposes of withholding under §§ 1441 through 1443 will also operate to establish the foreign status of such partner under this section. However, except as set forth in § 1.1446-2(b)(4)(iii) (regarding withholding qualified holders (as defined in § 1.1445-1(g)(11)) and § 1.1446-3(c)(3) (regarding certain tax-exempt organizations described in section 501(c)), the submission of Form W-8EXP (or successor) will have no effect on whether there is a 1446 tax due with respect to such partner's allocable share of partnership ECTI. For example, a partnership must still pay 1446 tax with respect to a foreign government partner's allocable share of ECTI because such partner is treated as a foreign corporation under section 892(a)(3). If no Form W-8 is submitted for purposes of withholding under sections 1441 through 1443, then such government, tax-exempt organization, or person must generally submit Form W-8BEN.

  (H) Foreign corporations, certain foreign trusts, and foreign estates. Consistent with the rules of this paragraph (c)(2) and paragraph (c)(3) of this section, a foreign corporation, a foreign trust (other than a foreign grantor trust described in paragraph (c)(2)(ii)(E) of this section), or a foreign estate may generally submit any appropriate Form W-8 (for example, Form W-8BEN-E or Form W-8IMY) to the partnership to establish its foreign status for purposes of section 1446. In addition, a foreign entity may also submit a certification of non-foreign status (including a Form W-8EXP) described in § 1.1445-5(b)(3)(ii) for purposes of documenting itself as a withholding qualified holder (as defined in § 1.1445-1(g)(11)).

  (iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and statement—(A) Partnership reliance on withholding certificate. In general, for purposes of this section, a partnership may rely on a valid Form W-8 (e.g., Form W-8BEN) or Form W-9, or statement described in this paragraph (c)(2) from a partner, beneficial owner, or grantor trust to determine whether that person, beneficial owner, or the owner of a grantor trust, is a non-foreign or foreign partner for purposes of computing 1446 tax, and if such person is a foreign partner, to determine whether or not such person is a corporation for U.S. tax purposes. The rules of paragraph (c)(3) of this section shall apply to a partnership that receives a Form W-8IMY from a foreign grantor trust or a statement described in this paragraph (c)(2) from a domestic grantor trust, but does not receive a Form W-8 (e.g., Form W-8BEN) or Form W-9 identifying such grantor or other person. Further, a partnership may not rely on a Form W-8 or Form W-9, or statement described in this paragraph (c)(2), and such form or statement is therefore not valid for any installment period or Form 8804 filing date during which the partnership has actual knowledge or has reason to know that any information on the withholding certificate or statement is incorrect or unreliable and, if based on such knowledge or reason to know, the partnership should pay 1446 tax in an amount greater than would be the case if it relied on the certificate or statement.

  (B) Reason to know. A partnership has reason to know that information on a withholding certificate or statement is incorrect or unreliable if its knowledge of relevant facts or statements contained on the form or other documentation is such that a reasonably prudent person in the position of the withholding agent would question the claims made. See §§ 1.1441-1(e)(4)(viii) and 1.1441-7(b)(1) and (2).

  (C) Subsequent knowledge and impact on penalties. If the partnership does not have actual knowledge or reason to know that a Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement received from a partner, beneficial owner, or grantor trust contains incorrect or unreliable information, but it subsequently determines that the certificate or statement contains incorrect or unreliable information, and, based on such knowledge the partnership should pay 1446 tax in an amount greater than would be the case if it relied on the certificate or statement, then the partnership will not be subject to penalties for its failure to pay the 1446 tax in reliance on such certificate or statement for any installment payment date prior to the date that the determination is made. See §§ 1.1446-1(c)(4) and 1.1446-3 concerning penalties for failure to pay the withholding tax when a partnership knows or has reason to know that a withholding certificate or statement is incorrect or unreliable.

  (iv) Requirements for certificates to be valid. Except as otherwise provided in this paragraph (c), for purposes of this section, the validity of a Form W-9 shall be determined under section 3406 and § 31.3406(h)-3(e) of this chapter which establish when such form may be reasonably relied upon. A Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form W-8EXP is only valid for purposes of this section if its validity period has not expired, the partner submitting the form has signed it under penalties of perjury, and it contains all the required information.

  (A) When period of validity expires. For purposes of this section, a Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form W-8EXP submitted by a partner shall be valid until the end of the period of validity determined for such form under § 1.1441-1(e). With respect to a foreign partnership submitting Form W-8IMY, the period of validity of such form shall be determined under § 1.1441-1(e) as if such foreign partnership submitted the form required of a nonwithholding foreign partnership. See § 1.1441-1(e)(4)(ii).

  (B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP. Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP submitted under this section must contain the partner's name, permanent address and Taxpayer Identification Number (TIN), the country under the laws of which the partner is formed, incorporated or governed (if the person is not an individual), the classification of the partner for U.S. Federal tax purposes (e.g., partnership, corporation), and any other information required to be submitted by the forms or instructions for such form, as applicable.

  (v) Partner must provide new withholding certificate when there is a change in circumstances. The principles of § 1.1441-1(e)(4)(ii)(D) shall apply when a change in circumstances has occurred (including situations where the status of a U.S. person changes) that requires a partner to provide a new withholding certificate.

  (vi) Partnership must retain withholding certificates. A partnership or nominee who has responsibility for paying 1446 tax under this section or § 1.1446-4 must retain each withholding certificate, statement, and other information received from its direct and indirect partners for as long as it may be relevant to the determination of the withholding agent's 1446 tax liability under section 1461 and the regulations thereunder.

  (3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement. Except as otherwise provided in this paragraph (c)(3), a partnership that does not receive a valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph (c)(2) of this section from a partner, beneficial owner, or grantor trust, or a partnership that receives a withholding certificate or statement but has actual knowledge or reason to know that the information on the certificate or statement is incorrect or unreliable, must presume that the partner is a foreign person. Except as provided in § 1.1446-3(a)(2) and § 1.1446-5(c)(2), a partnership that knows that a partner is an individual shall treat the partner as a nonresident alien. Except as provided in § 1.1446-3(a)(2) and § 1.1446-5(c)(2), a partnership that knows that a partner is an entity shall treat the partner as a corporation if the entity is a corporation as defined in § 301.7701-2(b)(8) of this chapter. See § 1.1446-3(a)(2) which prohibits a partnership in certain circumstances from considering preferential tax rates in computing its 1446 tax when the presumption and rules of this paragraph (c)(3) apply. In all other cases, the partnership shall treat the partner as either a nonresident alien or a foreign corporation, whichever classification results in a higher 1446 tax being due, and shall pay the 1446 tax in accordance with this presumption. Except as provided in § 1.1446-5(c)(2), the presumption set forth in this paragraph (c)(3) that a partner is a foreign person shall not apply to the extent that the partnership relies on other means to ascertain the non-foreign status of a partner and the partnership is correct in its determination that such partner is a U.S. person. A partnership is in no event required to rely upon other means to determine the non-foreign status of a partner and may demand that a partner furnish an acceptable certificate under this section. If a certificate is not provided in such circumstances, the partnership may presume that the partner is a foreign partner, and for purposes of sections 1461 through 1463, will be considered to have been required to pay 1446 tax on such partner's allocable share of partnership ECTI.

  (4) Consequences when partnership knows or has reason to know that Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is incorrect or unreliable and does not withhold. If a partnership has actual knowledge or has reason to know that a Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph (c)(2) of this section submitted by a partner, beneficial owner, or grantor trust contains incorrect or unreliable information (either because the certificate or statement when given to the partnership contained incorrect information or because there has been a change in facts that makes information on the certificate or statement incorrect), and the partnership pays less than the full amount of 1446 tax due on ECTI allocable to that partner, the partnership shall be fully liable under section 1461 and § 1.1461-3 (§ 1.1461-1 for publicly traded partnerships subject to § 1.1446-4) and § 1.1446-3, and for all applicable penalties and interest, for any failure to pay the 1446 tax for the period during which the partnership has such knowledge or reason to know that the certificate contained incorrect or unreliable information and for all subsequent installment periods. If a partner, beneficial owner, or grantor trust submits a new valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement, as applicable, the partnership may rely on that documentation when paying 1446 tax (or any installment of such tax) for any payment date that has not passed at the time such form is received.

  (5) Acceptable substitute form. A partnership or withholding agent responsible for paying 1446 tax (or any installment of such tax) may substitute its own form for the official version of Form W-8 (e.g., Form W-8BEN) that is recognized under this section to ascertain the identity of its partners, provided such form is consistent with § 1.1441-1(e)(4)(vi). All references under this section or §§ 1.1446-2 through 1.1446-6 to a Form W-8 (e.g., Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP) shall include the acceptable substitute form recognized under this paragraph (c)(5).

• Treas. Reg. §1.1446-1(a)In general. Show full text ▾ Collapse ▴

  In general. If a domestic or foreign partnership has effectively connected taxable income (ECTI) as computed under § 1.1446-2 for any partnership tax year, and any portion of such taxable income is allocable under section 704 to a foreign partner, then the partnership must pay a withholding tax under section 1446 (1446 tax) at the time and in the manner prescribed in this section, and §§ 1.1446-2 through 1.1446-6.

• Treas. Reg. §1.1446-1(b)Steps in determining 1446 tax obligation. Show full text ▾ Collapse ▴

  Steps in determining 1446 tax obligation. In general, a partnership determines its 1446 tax as follows. The partnership determines whether it has any foreign partners in accordance with paragraph (c) of this section. If the partnership does not have any foreign partners (including any person presumed to be foreign under paragraph (c) of this section and any domestic trust treated as foreign under § 1.1446-3(d)) during its taxable year, it generally will not have a 1446 tax obligation. If the partnership has one or more foreign partners, it then determines under § 1.1446-2 whether it has ECTI any portion of which is allocable under section 704 to one or more of the foreign partners. If the partnership has ECTI allocable under section 704 to one or more of its foreign partners, the partnership computes its 1446 tax, pays over 1446 tax, and reports the amount paid in accordance with the rules in § 1.1446-3. For special rules applicable to publicly traded partnerships, see § 1.1446-4. For special rules applicable to tiered partnership structures, see § 1.1446-5. For special rules that may apply in determining the amount of 1446 tax due with respect to a partner, see § 1.1446-6.

• Treas. Reg. §1.1446-1(c)Determining whether a partnership has a foreign partner—(1) In general. Show full text ▾ Collapse ▴

  Determining whether a partnership has a foreign partner—(1) In general. Except as otherwise provided in this section, § 1.1446-3, and § 1.1446-5, only a partnership that has at least one foreign partner during the partnership's taxable year can have a 1446 tax liability. Generally, the term foreign partner means any partner of the partnership that is not a U.S. person within the meaning of section 7701(a)(30). Thus, a partner of the partnership is generally a foreign partner if the partner is a nonresident alien, foreign partnership (see § 1.1446-5 for rules that allow a lower-tier partnership to look through an upper-tier foreign partnership to the partners of such partnership for purposes of computing its 1446 tax), foreign corporation (which includes a foreign government pursuant to section 892(a)(3)), foreign estate or trust (see paragraph (c)(2) of this section for rules that instruct a partnership to consider the grantor or other owner of a trust under subpart E of subchapter J as the partner for purposes of computing the partnership's 1446 tax), as those terms are defined under section 7701 and the regulations thereunder, or a foreign organization described in section 501(c), or other foreign person. A person also is a foreign partner if the person is presumed to be a foreign person under paragraph (c)(3) of this section. For purposes of this section, a partner that is treated as a U.S. person for all income tax purposes (by election or otherwise, see e.g., sections 953(d) and 1504(d)) will not be a foreign partner, provided the partner has provided the partnership a valid Form W-9, “Request for Taxpayer Identification Number and Certification,” or the partnership uses other means to determine that the partner is not a foreign partner (see paragraph (c)(3) of this section). A partner that is treated as a U.S. person only for certain specified purposes is considered a foreign partner for purposes of section 1446, and a partnership must pay 1446 tax on the portion of ECTI allocable to that partner. For example, a partnership must generally pay 1446 tax on ECTI allocable to a foreign corporate partner that has made an election under section 897(i).

  (2) Submission of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, and W-9—(i) In general. Except as otherwise provided in this paragraph (c)(2) or paragraph (c)(3) of this section, a partnership must generally determine whether a partner is a foreign partner, and the partner's tax classification (e.g., corporate or non-corporate), by obtaining a withholding certificate from the partner that is a Form W-8BEN, “Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding,” Form W-8IMY, “Certificate of Foreign Intermediary, Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding,” Form W-8ECI, “Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States,” Form W-8EXP, “Certificate of Foreign Government or other Foreign Organization for United States Tax Withholding,” or a Form W-9, as applicable, or an acceptable substitute form permitted under paragraph (c)(5) of this section. Generally, a foreign partner that is a nonresident alien, a foreign estate or trust (other than a grantor trust described in this paragraph (c)(2)), a foreign corporation, or a foreign government should provide a valid Form W-8BEN.

  (ii) Withholding certificate applicable to each type of partner. A partner that submits a valid Form W-8 (e.g., Form W-8BEN) for purposes of section 1441 or 1442 will generally satisfy the documentation requirements of this section provided that the submission of such form is not inconsistent with the rules of this paragraph (c)(2) or paragraph (c)(3) of this section. The following rules shall apply for purposes of this section.

  (A) U.S. person. A partner that is a U.S. person (other than a grantor trust described in this paragraph (c)(2)), including a domestic partnership and domestic simple or complex trust (including an estate), shall provide a valid Form W-9.

  (B) Nonresident alien. A Form W-8 (e.g., Form W-8BEN) submitted by a nonresident alien for purposes of withholding under section 1441 will generally be accepted for purposes of section 1446. If no such form is submitted for purposes of section 1441, such nonresident alien shall submit Form W-8BEN for purposes of section 1446.

  (C) Foreign partnership. A partner that is a foreign partnership generally shall provide a valid Form W-8IMY for purposes of section 1446. See § 1.1446-5 (permitting a lower-tier partnership to look through an upper-tier foreign partnership in certain circumstances when computing 1446 tax).

  (D) Disregarded entities. An entity that is disregarded as an entity separate from its owner under § 301.7701-3 of this chapter (whether domestic or foreign) shall not submit a Form W-8 (e.g., Form W-8BEN) or Form W-9. Instead, the owner of such entity for Federal tax purposes shall submit appropriate documentation to comply with this section. See §§ 301.7701-1 through 301.7701-3 of this chapter for determining the U.S. Federal tax classification of a partner.

  (E) Domestic and foreign grantor trusts. To the extent that a grantor or other person is treated as the owner of any portion of a trust under subpart E of subchapter J of the Internal Revenue Code, such trust shall provide documentation under this paragraph (c)(2) to identify the trust as a grantor trust and provide documentation on behalf of the grantor or other person treated as the owner of all or a portion of such trust as required by this paragraph (c)(2). If such trust is a foreign trust, the trust shall submit Form W-8IMY to the partnership identifying itself as a foreign grantor trust and shall provide such documentation (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, or W-9) and information pertaining to its grantor or other owner to the partnership that permits the partnership to reliably associate (within the meaning of § 1.1441-1(b)(2)(vii)) such portion of the trust's allocable share of partnership ECTI with the grantor or other person that is the owner of such portion of the trust. If such trust is a domestic trust, the trust shall furnish the partnership a statement under penalty of perjury that the trust is, in whole or in part, a domestic grantor trust and such statement shall identify that portion of the trust that is treated as owned by a grantor or another person under subpart E of subchapter J of the Internal Revenue Code. The trust shall also provide such documentation and information (e.g., Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, or W-9) pertaining to its grantor or other owner(s) to the partnership that permits the partnership to reliably associate (within the meaning of § 1.1441-1(b)(2)(vii)) such portion of the trust's allocable share of partnership ECTI with the grantor or other person that is the owner of such portion of the trust.

  (F) Nominees. Where a nominee holds an interest in a partnership on behalf of another person, the beneficial owner of the partnership interest, not the nominee, shall submit a Form W-8 (e.g., Form W-8BEN) or Form W-9 to the partnership or nominee that is the withholding agent.

  (G) Foreign governments, foreign tax-exempt organizations and other foreign persons. A Form W-8 (e.g., Form W-8EXP) submitted by a partner that is a foreign government, foreign tax-exempt organization, or other foreign person for purposes of withholding under §§ 1441 through 1443 will also operate to establish the foreign status of such partner under this section. However, except as set forth in § 1.1446-2(b)(4)(iii) (regarding withholding qualified holders (as defined in § 1.1445-1(g)(11)) and § 1.1446-3(c)(3) (regarding certain tax-exempt organizations described in section 501(c)), the submission of Form W-8EXP (or successor) will have no effect on whether there is a 1446 tax due with respect to such partner's allocable share of partnership ECTI. For example, a partnership must still pay 1446 tax with respect to a foreign government partner's allocable share of ECTI because such partner is treated as a foreign corporation under section 892(a)(3). If no Form W-8 is submitted for purposes of withholding under sections 1441 through 1443, then such government, tax-exempt organization, or person must generally submit Form W-8BEN.

  (H) Foreign corporations, certain foreign trusts, and foreign estates. Consistent with the rules of this paragraph (c)(2) and paragraph (c)(3) of this section, a foreign corporation, a foreign trust (other than a foreign grantor trust described in paragraph (c)(2)(ii)(E) of this section), or a foreign estate may generally submit any appropriate Form W-8 (for example, Form W-8BEN-E or Form W-8IMY) to the partnership to establish its foreign status for purposes of section 1446. In addition, a foreign entity may also submit a certification of non-foreign status (including a Form W-8EXP) described in § 1.1445-5(b)(3)(ii) for purposes of documenting itself as a withholding qualified holder (as defined in § 1.1445-1(g)(11)).

  (iii) Effect of Forms W-8BEN, W-8IMY, W-8ECI, W-8EXP, W-9, and statement—(A) Partnership reliance on withholding certificate. In general, for purposes of this section, a partnership may rely on a valid Form W-8 (e.g., Form W-8BEN) or Form W-9, or statement described in this paragraph (c)(2) from a partner, beneficial owner, or grantor trust to determine whether that person, beneficial owner, or the owner of a grantor trust, is a non-foreign or foreign partner for purposes of computing 1446 tax, and if such person is a foreign partner, to determine whether or not such person is a corporation for U.S. tax purposes. The rules of paragraph (c)(3) of this section shall apply to a partnership that receives a Form W-8IMY from a foreign grantor trust or a statement described in this paragraph (c)(2) from a domestic grantor trust, but does not receive a Form W-8 (e.g., Form W-8BEN) or Form W-9 identifying such grantor or other person. Further, a partnership may not rely on a Form W-8 or Form W-9, or statement described in this paragraph (c)(2), and such form or statement is therefore not valid for any installment period or Form 8804 filing date during which the partnership has actual knowledge or has reason to know that any information on the withholding certificate or statement is incorrect or unreliable and, if based on such knowledge or reason to know, the partnership should pay 1446 tax in an amount greater than would be the case if it relied on the certificate or statement.

  (B) Reason to know. A partnership has reason to know that information on a withholding certificate or statement is incorrect or unreliable if its knowledge of relevant facts or statements contained on the form or other documentation is such that a reasonably prudent person in the position of the withholding agent would question the claims made. See §§ 1.1441-1(e)(4)(viii) and 1.1441-7(b)(1) and (2).

  (C) Subsequent knowledge and impact on penalties. If the partnership does not have actual knowledge or reason to know that a Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement received from a partner, beneficial owner, or grantor trust contains incorrect or unreliable information, but it subsequently determines that the certificate or statement contains incorrect or unreliable information, and, based on such knowledge the partnership should pay 1446 tax in an amount greater than would be the case if it relied on the certificate or statement, then the partnership will not be subject to penalties for its failure to pay the 1446 tax in reliance on such certificate or statement for any installment payment date prior to the date that the determination is made. See §§ 1.1446-1(c)(4) and 1.1446-3 concerning penalties for failure to pay the withholding tax when a partnership knows or has reason to know that a withholding certificate or statement is incorrect or unreliable.

  (iv) Requirements for certificates to be valid. Except as otherwise provided in this paragraph (c), for purposes of this section, the validity of a Form W-9 shall be determined under section 3406 and § 31.3406(h)-3(e) of this chapter which establish when such form may be reasonably relied upon. A Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form W-8EXP is only valid for purposes of this section if its validity period has not expired, the partner submitting the form has signed it under penalties of perjury, and it contains all the required information.

  (A) When period of validity expires. For purposes of this section, a Form W-8BEN, Form W-8IMY, Form W-8ECI, or Form W-8EXP submitted by a partner shall be valid until the end of the period of validity determined for such form under § 1.1441-1(e). With respect to a foreign partnership submitting Form W-8IMY, the period of validity of such form shall be determined under § 1.1441-1(e) as if such foreign partnership submitted the form required of a nonwithholding foreign partnership. See § 1.1441-1(e)(4)(ii).

  (B) Required information for Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP. Forms W-8BEN, W-8IMY, W-8ECI, and W-8EXP submitted under this section must contain the partner's name, permanent address and Taxpayer Identification Number (TIN), the country under the laws of which the partner is formed, incorporated or governed (if the person is not an individual), the classification of the partner for U.S. Federal tax purposes (e.g., partnership, corporation), and any other information required to be submitted by the forms or instructions for such form, as applicable.

• Treas. Reg. §1.1446-1(v)Partner must provide new withholding certificate when there is a change in circumstances. Show full text ▾ Collapse ▴

  Partner must provide new withholding certificate when there is a change in circumstances. The principles of § 1.1441-1(e)(4)(ii)(D) shall apply when a change in circumstances has occurred (including situations where the status of a U.S. person changes) that requires a partner to provide a new withholding certificate.

  (vi) Partnership must retain withholding certificates. A partnership or nominee who has responsibility for paying 1446 tax under this section or § 1.1446-4 must retain each withholding certificate, statement, and other information received from its direct and indirect partners for as long as it may be relevant to the determination of the withholding agent's 1446 tax liability under section 1461 and the regulations thereunder.

  (3) Presumptions in the absence of valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement. Except as otherwise provided in this paragraph (c)(3), a partnership that does not receive a valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph (c)(2) of this section from a partner, beneficial owner, or grantor trust, or a partnership that receives a withholding certificate or statement but has actual knowledge or reason to know that the information on the certificate or statement is incorrect or unreliable, must presume that the partner is a foreign person. Except as provided in § 1.1446-3(a)(2) and § 1.1446-5(c)(2), a partnership that knows that a partner is an individual shall treat the partner as a nonresident alien. Except as provided in § 1.1446-3(a)(2) and § 1.1446-5(c)(2), a partnership that knows that a partner is an entity shall treat the partner as a corporation if the entity is a corporation as defined in § 301.7701-2(b)(8) of this chapter. See § 1.1446-3(a)(2) which prohibits a partnership in certain circumstances from considering preferential tax rates in computing its 1446 tax when the presumption and rules of this paragraph (c)(3) apply. In all other cases, the partnership shall treat the partner as either a nonresident alien or a foreign corporation, whichever classification results in a higher 1446 tax being due, and shall pay the 1446 tax in accordance with this presumption. Except as provided in § 1.1446-5(c)(2), the presumption set forth in this paragraph (c)(3) that a partner is a foreign person shall not apply to the extent that the partnership relies on other means to ascertain the non-foreign status of a partner and the partnership is correct in its determination that such partner is a U.S. person. A partnership is in no event required to rely upon other means to determine the non-foreign status of a partner and may demand that a partner furnish an acceptable certificate under this section. If a certificate is not provided in such circumstances, the partnership may presume that the partner is a foreign partner, and for purposes of sections 1461 through 1463, will be considered to have been required to pay 1446 tax on such partner's allocable share of partnership ECTI.

  (4) Consequences when partnership knows or has reason to know that Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, or Form W-9 is incorrect or unreliable and does not withhold. If a partnership has actual knowledge or has reason to know that a Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement required by paragraph (c)(2) of this section submitted by a partner, beneficial owner, or grantor trust contains incorrect or unreliable information (either because the certificate or statement when given to the partnership contained incorrect information or because there has been a change in facts that makes information on the certificate or statement incorrect), and the partnership pays less than the full amount of 1446 tax due on ECTI allocable to that partner, the partnership shall be fully liable under section 1461 and § 1.1461-3 (§ 1.1461-1 for publicly traded partnerships subject to § 1.1446-4) and § 1.1446-3, and for all applicable penalties and interest, for any failure to pay the 1446 tax for the period during which the partnership has such knowledge or reason to know that the certificate contained incorrect or unreliable information and for all subsequent installment periods. If a partner, beneficial owner, or grantor trust submits a new valid Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP, Form W-9, or statement, as applicable, the partnership may rely on that documentation when paying 1446 tax (or any installment of such tax) for any payment date that has not passed at the time such form is received.

  (5) Acceptable substitute form. A partnership or withholding agent responsible for paying 1446 tax (or any installment of such tax) may substitute its own form for the official version of Form W-8 (e.g., Form W-8BEN) that is recognized under this section to ascertain the identity of its partners, provided such form is consistent with § 1.1441-1(e)(4)(vi). All references under this section or §§ 1.1446-2 through 1.1446-6 to a Form W-8 (e.g., Form W-8BEN, Form W-8IMY, Form W-8ECI, Form W-8EXP) shall include the acceptable substitute form recognized under this paragraph (c)(5).

• Treas. Reg. §1.1446-2Determining a partnership's effectively connected taxable income allocable to foreign partners under section 704 Show full text ▾ Collapse ▴

  (a) In general. A partnership's effectively connected taxable income (ECTI) is generally the partnership's taxable income as computed under section 703, with adjustments as provided in section 1446(c) and this section, and computed with consideration of only those partnership items which are effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States. For purposes of determining the section 1446 withholding tax (1446 tax) or any installment of such tax under § 1.1446-3, partnership ECTI allocable under section 704 to foreign partners is the sum of the allocable shares of ECTI of each of the partnership's foreign partners as determined under paragraph (b) of this section. See § 1.1446-6 (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership's 1446 tax). The calculation of partnership ECTI allocable to foreign partners as set forth in paragraph (b) of this section and the partnership's withholding tax obligation are partnership-level computations solely for purposes of determining the 1446 tax. Therefore, any deduction that is not taken into account in calculating a partner's allocable share of partnership ECTI (e.g., percentage depletion), but which is a deduction that under U.S. tax law the foreign partner is otherwise entitled to claim, can still be claimed by the foreign partner when computing its U.S. tax liability and filing its U.S. income tax return, subject to any restriction or limitation that otherwise may apply.

  (b) Computation—(1) In general. A foreign partner's allocable share of partnership ECTI for the partnership's taxable year that is allocable under section 704 to a particular foreign partner is equal to that foreign partner's distributive share of partnership gross income and gain for the partnership's taxable year that is effectively connected and properly allocable to the partner under section 704 and the regulations thereunder, reduced by the foreign partner's distributive share of partnership deductions for the partnership taxable year that are connected with such income under section 873(a) or 882(c) and properly allocable to the partner under section 704 and the regulations thereunder, in each case, after application of the rules of this section. See § 1.1446-6 (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership's 1446 tax). For these purposes, a foreign partner's distributive share of effectively connected gross income and gain and the deductions connected with such income shall be computed by considering allocations that are respected under the rules of section 704 and § 1.704-1(b)(1), including special allocations in the partnership agreement (as defined in § 1.704-1(b)(2)(ii)(h)), and adjustments to the basis of partnership property described in section 743 pursuant to an election by the partnership under section 754 (see § 1.743-1(j)). The character of effectively connected partnership items (capital versus ordinary) shall be separately considered only to the extent set forth in paragraph (b)(3)(v) of this section and, when applicable, sections 1.1446-3(a)(2)(consideration of preferential rates when computing 1446 tax) and section 1.1446-6 (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership's 1446 tax).

  (2) Income and gain rules. For purposes of computing a foreign partner's allocable share of partnership ECTI under this paragraph (b), the following rules shall apply with respect to partnership income and gain.

  (i) Application of the principles of section 864. The determination of whether a partnership's items of gross income are effectively connected shall be made by applying the principles of section 864 and the regulations thereunder.

  (ii) Income treated as effectively connected. A partnership's items of gross income that are effectively connected include any income that is treated as effectively connected income, including partnership income subject to a partner's election under section 871(d) or section 882(d), any partnership income treated as effectively connected with the conduct of a U.S. trade or business pursuant to section 897, and any other items of partnership income treated as effectively connected under another provision of the Internal Revenue Code, without regard to whether those amounts are taxable to the partner. A partner that makes the election under section 871(d) or section 882(d) shall furnish to the partnership a statement that indicates that such election has been made. See § 1.871-10(d)(3). If a partnership receives a valid Form W-8ECI from a partner, the partner is deemed, for purposes of section 1446, to have effectively connected income subject to withholding under section 1446 to the extent of the items identified on the form.

  (iii) Exempt income. A foreign partner's allocable share of partnership ECTI does not include income or gain exempt from U.S. tax by reason of a provision of the Internal Revenue Code. A foreign partner's allocable share of partnership ECTI also does not include income or gain exempt from U.S. tax by operation of any U.S. income tax treaty or reciprocal agreement. In the case of income excluded by reason of a treaty provision, such income must be derived by a resident of an applicable treaty jurisdiction, the resident must be the beneficial owner of the item, and all other requirements for benefits under the treaty must be satisfied. The partnership must have received from the partner a valid withholding certificate, that is, Form W-8BEN (see § 1.1446-1(c)(2)(iii) regarding when a Form W-8BEN is valid for purposes of this section), containing the information necessary to support the claim for treaty benefits required in the forms and instructions. In addition, for purposes of this section, the withholding certificate must contain the beneficial owner's taxpayer identification number.

  (3) Deductions and losses. For purposes of computing a foreign partner's allocable share of partnership ECTI under this paragraph (b), the following rules shall apply with respect to deductions and losses.

  (i) Oil and gas interests. The deduction for depletion with respect to oil and gas wells shall be allowed, but the amount of such deduction shall be determined without regard to sections 613 and 613A.

  (ii) Charitable contributions. The deduction for charitable contributions provided in section 170 shall not be allowed.

  (iii) Net operating losses and other suspended or carried losses. Except as provided in § 1.1446-6, the net operating loss deduction of any foreign partner provided in section 172 shall not be taken into account. Further, except as provided in § 1.1446-6, the partnership shall not take into account any suspended losses (e.g., losses in excess of a partner's basis in the partnership, see section 704(d)) or any capital loss carrybacks or carryovers available to a foreign partner.

  (iv) Interest deductions. The rules of this paragraph (b)(3)(iv) shall apply for purposes of determining the amount of interest expense that is allocable to income which is (or is treated as) effectively connected with the conduct of a trade or business for purposes of calculating a foreign partner's allocable share of partnership ECTI. In the case of a non-corporate foreign partner, the rules of § 1.861-9T(e)(7) shall apply. In the case of a corporate foreign partner, the rules of § 1.882-5 shall apply by treating the partnership as a foreign corporation and using the partner's pro-rata share of the partnership's assets and liabilities for these purposes. For these purposes, the rules governing elections under § 1.882-5(a)(7) shall be made at the partnership level.

  (v) Limitation on capital losses. Losses from the sale or exchange of capital assets allocable under section 704 to a partner shall be allowed only to the extent of gains from the sale or exchange of capital assets allocable under section 704 to such partner.

  (vi) Other deductions. No deduction shall be allowed for personal exemptions provided in section 151 or the additional itemized deductions for individuals provided in part VII of subchapter B of the Internal Revenue Code (section 211 and following).

  (vii) Limitations on deductions. Except as provided in § 1.1446-6 and this paragraph (b)(3), any limitations on losses or deductions that apply at the partner level when determining ECTI allocable to a foreign partner shall not be taken into account.

  (4) Other rules—(i) Exclusion of items allocated to U.S. partners. Except as provided in § 1.1446-5(e), in computing partnership ECTI, the partnership shall not take into account any item of income, gain, loss, or deduction to the extent allocable to any partner that is not a foreign partner, as that term is defined in § 1.1446-1(c).

  (ii) Partnership credits. See § 1.1446-3(a) providing that the 1446 tax is computed without regard to a partner's distributive share of the partnership's tax credits.

  (iii) Special rule for qualified holders. With respect to a foreign partner that is a withholding qualified holder (as defined in § 1.1445-1(g)(11)), the foreign partner's allocable share of partnership ECTI does not include gain or loss that is not taken into account under § 1.897(l)-1(b) and that is not otherwise treated as effectively connected with a trade or business in the United States. The partnership must have received from the partner a valid certificate of non-foreign status (including a Form W-8EXP) described in § 1.1445-2(b)(2)(i) or § 1.1445-5(b)(3)(ii). See § 1.1446-1(c)(2)(ii)(G) and (H) regarding documentation of withholding qualified holders.

  (5) Examples. The following examples illustrate the application of this section. In considering the examples, disregard the potential application of § 1.1446-3(b)(2)(v)(F) (relating to the de minimis exception to paying 1446 tax). The examples are as follows:

• Treas. Reg. §1.1446-2(a)In general. Show full text ▾ Collapse ▴

  In general. A partnership's effectively connected taxable income (ECTI) is generally the partnership's taxable income as computed under section 703, with adjustments as provided in section 1446(c) and this section, and computed with consideration of only those partnership items which are effectively connected (or treated as effectively connected) with the conduct of a trade or business in the United States. For purposes of determining the section 1446 withholding tax (1446 tax) or any installment of such tax under § 1.1446-3, partnership ECTI allocable under section 704 to foreign partners is the sum of the allocable shares of ECTI of each of the partnership's foreign partners as determined under paragraph (b) of this section. See § 1.1446-6 (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership's 1446 tax). The calculation of partnership ECTI allocable to foreign partners as set forth in paragraph (b) of this section and the partnership's withholding tax obligation are partnership-level computations solely for purposes of determining the 1446 tax. Therefore, any deduction that is not taken into account in calculating a partner's allocable share of partnership ECTI (e.g., percentage depletion), but which is a deduction that under U.S. tax law the foreign partner is otherwise entitled to claim, can still be claimed by the foreign partner when computing its U.S. tax liability and filing its U.S. income tax return, subject to any restriction or limitation that otherwise may apply.

• Treas. Reg. §1.1446-2(b)Computation—(1) In general. Show full text ▾ Collapse ▴

  Computation—(1) In general. A foreign partner's allocable share of partnership ECTI for the partnership's taxable year that is allocable under section 704 to a particular foreign partner is equal to that foreign partner's distributive share of partnership gross income and gain for the partnership's taxable year that is effectively connected and properly allocable to the partner under section 704 and the regulations thereunder, reduced by the foreign partner's distributive share of partnership deductions for the partnership taxable year that are connected with such income under section 873(a) or 882(c) and properly allocable to the partner under section 704 and the regulations thereunder, in each case, after application of the rules of this section. See § 1.1446-6 (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership's 1446 tax). For these purposes, a foreign partner's distributive share of effectively connected gross income and gain and the deductions connected with such income shall be computed by considering allocations that are respected under the rules of section 704 and § 1.704-1(b)(1), including special allocations in the partnership agreement (as defined in § 1.704-1(b)(2)(ii)(h)), and adjustments to the basis of partnership property described in section 743 pursuant to an election by the partnership under section 754 (see § 1.743-1(j)). The character of effectively connected partnership items (capital versus ordinary) shall be separately considered only to the extent set forth in paragraph (b)(3)(v) of this section and, when applicable, sections 1.1446-3(a)(2)(consideration of preferential rates when computing 1446 tax) and section 1.1446-6 (special rules permitting the partnership to consider partner-level deductions and losses to reduce the partnership's 1446 tax).

  (2) Income and gain rules. For purposes of computing a foreign partner's allocable share of partnership ECTI under this paragraph (b), the following rules shall apply with respect to partnership income and gain.

• Treas. Reg. §1.1446-2(i)Oil and gas interests. Show full text ▾ Collapse ▴

  Oil and gas interests. The deduction for depletion with respect to oil and gas wells shall be allowed, but the amount of such deduction shall be determined without regard to sections 613 and 613A.

  (ii) Charitable contributions. The deduction for charitable contributions provided in section 170 shall not be allowed.

  (iii) Net operating losses and other suspended or carried losses. Except as provided in § 1.1446-6, the net operating loss deduction of any foreign partner provided in section 172 shall not be taken into account. Further, except as provided in § 1.1446-6, the partnership shall not take into account any suspended losses (e.g., losses in excess of a partner's basis in the partnership, see section 704(d)) or any capital loss carrybacks or carryovers available to a foreign partner.

  (iv) Interest deductions. The rules of this paragraph (b)(3)(iv) shall apply for purposes of determining the amount of interest expense that is allocable to income which is (or is treated as) effectively connected with the conduct of a trade or business for purposes of calculating a foreign partner's allocable share of partnership ECTI. In the case of a non-corporate foreign partner, the rules of § 1.861-9T(e)(7) shall apply. In the case of a corporate foreign partner, the rules of § 1.882-5 shall apply by treating the partnership as a foreign corporation and using the partner's pro-rata share of the partnership's assets and liabilities for these purposes. For these purposes, the rules governing elections under § 1.882-5(a)(7) shall be made at the partnership level.

• Treas. Reg. §1.1446-2(v)Limitation on capital losses. Show full text ▾ Collapse ▴

  Limitation on capital losses. Losses from the sale or exchange of capital assets allocable under section 704 to a partner shall be allowed only to the extent of gains from the sale or exchange of capital assets allocable under section 704 to such partner.

  (vi) Other deductions. No deduction shall be allowed for personal exemptions provided in section 151 or the additional itemized deductions for individuals provided in part VII of subchapter B of the Internal Revenue Code (section 211 and following).

  (vii) Limitations on deductions. Except as provided in § 1.1446-6 and this paragraph (b)(3), any limitations on losses or deductions that apply at the partner level when determining ECTI allocable to a foreign partner shall not be taken into account.

  (4) Other rules—(i) Exclusion of items allocated to U.S. partners. Except as provided in § 1.1446-5(e), in computing partnership ECTI, the partnership shall not take into account any item of income, gain, loss, or deduction to the extent allocable to any partner that is not a foreign partner, as that term is defined in § 1.1446-1(c).

  (ii) Partnership credits. See § 1.1446-3(a) providing that the 1446 tax is computed without regard to a partner's distributive share of the partnership's tax credits.

  (iii) Special rule for qualified holders. With respect to a foreign partner that is a withholding qualified holder (as defined in § 1.1445-1(g)(11)), the foreign partner's allocable share of partnership ECTI does not include gain or loss that is not taken into account under § 1.897(l)-1(b) and that is not otherwise treated as effectively connected with a trade or business in the United States. The partnership must have received from the partner a valid certificate of non-foreign status (including a Form W-8EXP) described in § 1.1445-2(b)(2)(i) or § 1.1445-5(b)(3)(ii). See § 1.1446-1(c)(2)(ii)(G) and (H) regarding documentation of withholding qualified holders.

  (5) Examples. The following examples illustrate the application of this section. In considering the examples, disregard the potential application of § 1.1446-3(b)(2)(v)(F) (relating to the de minimis exception to paying 1446 tax). The examples are as follows:

• Treas. Reg. §1.1446-3Time and manner of calculating and paying over the 1446 tax Show full text ▾ Collapse ▴

  (a) In general—(1) Calculating 1446 tax. This section provides rules for calculating, reporting, and paying over the section 1446 withholding tax (1446 tax). A partnership's 1446 tax equals the amount determined under this section and shall be paid in installments during the partnership's taxable year (see paragraph (d)(1) of this section for installment payment due dates), with any remaining tax due paid with the partnership's annual return required to be filed pursuant to paragraph (d) of this section. For these purposes, a partnership shall not take into account either a partner's liability for any other tax imposed under any other provision of the Internal Revenue Code (e.g., section 55 or 884) or a partner's distributive share of the partnership's tax credits when determining the amount of the partnership's 1446 tax.

  (2) Applicable percentage—(i) In general. Except as provided in this paragraph (a)(2), in the case of a foreign partner that is a corporation for U.S. tax purposes, the applicable percentage is the highest rate of tax specified in section 11(b) for such taxable year. Except as provided in this paragraph (a)(2) and § 1.1446-5, in the case of a foreign partner that is not a corporation for U.S. tax purposes (e.g., a partnership, individual, trust or estate), the applicable percentage is the highest rate of tax specified in section 1.

  (ii) Special types of income or gain. Except as otherwise provided, a partnership is permitted to consider as the applicable percentage under this paragraph (a)(2) the highest rate of tax applicable to a particular type of income or gain allocable to a partner (e.g., long-term capital gain allocable to a non-corporate partner, unrecaptured section 1250 gain, collectibles gain under section 1(h)), to the extent of a partner's allocable share of such income or gain. Consideration of the highest rate of tax applicable to a particular type of income or gain under the previous sentence shall be made without regard to the amount of such partner's income. A partnership is not permitted to consider the highest rate of tax applicable to a particular type of income or gain under this paragraph (a)(2)(ii) if the application of the preferential rate depends upon the corporate or non-corporate status of the person reporting the income or gain and, either no documentation has been provided to the partnership under § 1.1446-1 to establish the corporate or non-corporate status of the partner required to pay tax on the income or gain, or the partnership is otherwise required to compute and pay 1446 tax on such portion of the income or gain using the highest applicable percentage under section 1446(b). See e.g., §§ 1.1446-1(c)(3) (presumption of foreign status in the absence of documentation) and 1.1446-5(c)(2) (requirement to pay 1446 tax at higher of rates in section 1446(b) where a lower-tier partnership cannot reliably associate income with a partner of the upper-tier partnership).

  (b) Installment payments—(1) In general. Except as provided in § 1.1446-4 for certain publicly traded partnerships, a partnership must pay its 1446 tax by making installment payments of the 1446 tax based on the amount of partnership effectively connected taxable income (ECTI) allocable under section 704 to its foreign partners, without regard to whether the partnership makes any distributions to its partners during the partnership's taxable year. The amount of the installment payments is determined in accordance with this paragraph (b), and the tax must be paid at the times set forth in paragraph (d) of this section. Subject to paragraphs (b)(2)(v) and (b)(3)(ii) of this section, in computing its first installment of 1446 tax for a taxable year, a partnership must decide whether it will pay its 1446 tax for the entire taxable year by using the safe harbor set forth in paragraph (b)(3)(i) of this section, or by using one of several annualization methods available under paragraph (b)(2)(ii) of this section for computing partnership ECTI allocable to foreign partners. In the case of a partnership's underpayment of an installment of 1446 tax, the partnership shall be subject to an addition to the tax equal to the amount determined under section 6655, as modified by this section, as if such partnership were a corporation, as well as any other applicable interest and penalties. See § 1.1446-3(f). Section 6425 (permitting an adjustment for an overpayment of estimated tax by a corporation) shall not apply to a partnership's payment of its 1446 tax.

  (2) Calculation—(i) Application of the principles of section 6655—(A) In general. Installment payments of 1446 tax required during the partnership's taxable year are based upon partnership ECTI for the portion of the partnership taxable year to which the payments relate, and, except as set forth in this paragraph (b)(2) or paragraph (b)(3) of this section, shall be calculated using the principles of section 6655. The principles of section 6655, except as otherwise provided in § 1.6655-2, are applied to annualize the partnership's items of effectively connected income, gain, loss, and deduction to determine each foreign partner's allocable share of partnership ECTI. Each foreign partner's allocable share of partnership ECTI is then multiplied by the relevant applicable percentage for the type of income allocable to the foreign partner under paragraph (a)(2) of this section. The respective 1446 tax amounts are then added for each foreign partner to yield an annualized 1446 tax with respect to such partner. The installment of 1446 tax due with respect to a foreign partner equals the excess of the section 6655(e)(2)(B)(ii) percentage of the annualized 1446 tax for that partner (or, if applicable, the adjusted seasonal amount) for the relevant installment period, over the aggregate amount of 1446 tax installment payments previously paid with respect to that partner during the partnership's taxable year. The partnership's total 1446 tax installment payment equals the sum of the installment payments due for such period on behalf of all the partnership's foreign partners.

  (B) Calculation rules when certificates are submitted under § 1.1446-6. (1) To the extent applicable, in computing the 1446 tax due with respect to a foreign partner, a partnership may consider a certificate received from such partner under § 1.1446-6(c)(1)(i) or (ii) and the amount of state and local taxes permitted to be considered under § 1.1446-6(c)(1)(iii). For the purposes of applying this paragraph (b)(2)(i)(B), a partnership shall first annualize the partner's allocable share of the partnership's items of effectively connected income, gain, deduction, and loss before—

  (i) Considering under § 1.1446-6(c)(1)(i) the partner's certified deductions and losses;

  (ii) Determining under § 1.1446-6(c)(1)(ii) whether the 1446 tax otherwise due with respect to that partner is less than $1,000 (determined with regard to any certified deductions or losses); or

  (iii) Considering under § 1.1446-6(c)(1)(iii) the amount of state and local taxes withheld and remitted on behalf of the partner.

  (2) The amount of the limitation provided in § 1.1446-6(c)(1)(i)(C) shall be based on the partner's allocable share of these annualized amounts. For any installment period in which the partnership considers a partner's certificate, the partnership must also consider the following events to the extent they occur prior to the due date for paying the 1446 tax for such installment period—

  (i) The receipt of an updated certificate or status update from the partner under § 1.1446-6(c)(2)(ii)(B) certifying an amount of deductions or losses that is less than the amount reflected on the superseded certificate (see § 1.1446-6(e)(2) Example 4);

  (ii) The failure to receive an updated certificate or status update from the partner that should have been provided under § 1.1446-6(c)(2)(ii)(B); and

  (iii) The receipt of a notification from the IRS under § 1.1446-6(c)(3) or (5) (see § 1.1446-6(e)(2) Example 5).

  (ii) Annualization methods. A partnership that decides to annualize its income for the taxable year shall use one of the annualization methods set forth in section 6655(e) and the regulations thereunder, and as described in the forms and instructions for Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446),” Form 8805, “Foreign Partner's Information Statement of Section 1446 Withholding Tax,” and Form 8813, “Partnership Withholding Tax Payment Voucher.”

  (iii) Partner's estimated tax payments. In computing its installment payments of 1446 tax, a partnership may not take into account a partner's estimated tax payments.

  (iv) Partner whose interest terminates during the partnership's taxable year. If a partner's interest in the partnership terminates prior to the end of the partnership's taxable year, the partnership shall take into account the income that is allocable to the partner for the portion of the partnership taxable year that the person was a partner.

  (v) Exceptions and modifications to the application of the principles under section 6655. To the extent not otherwise modified in §§ 1.1446-1 through 1.1446-7 or inconsistent with those rules, the principles of section 6655 apply to the calculation of the installment payments of 1446 tax made by a partnership as set forth in this paragraph (b)(2)(v).

  (A) Inapplicability of special rules for large corporations. The principles of section 6655(d)(2), concerning large corporations (as defined in section 6655(g)(2)), shall not apply.

  (B) Inapplicability of special rules regarding early refunds. The principles of section 6655(h), applicable to amounts excessively credited or refunded under section 6425, shall not apply. See paragraph (b)(1) of this section providing that section 6425 shall not apply for purposes of the 1446 tax. This paragraph (b)(2)(v)(B) shall apply to 1446 tax paid by a partnership or nominee, as well as to amounts that a partner is deemed to have paid for estimated tax purposes by reason of the partnership's or nominee's 1446 tax payments under § 1.1446-3(d)(1)(i).

  (C) Period of underpayment. The period of the underpayment set forth in section 6655(b)(2) shall end on the earlier of the date the partnership is required to file Form 8804 (as provided in paragraph (d)(1)(iii) of this section and without regard to extensions), or with respect to any portion of the underpayment, the date on which such portion is paid.

  (D) Other taxes. Section 6655 shall be applied without regard to any references to alternative minimum taxable income and modified alternative minimum taxable income.

  (E) 1446 tax treated as tax under section 11. The principles of section 6655(g)(1) shall be applied to treat the 1446 tax as a tax imposed by section 11, and any partnership required to pay such tax shall be treated as a corporation.

  (F) Application of section 6655(f). A partnership subject to section 1446 shall apply section 6655(f) after aggregating the 1446 tax due (or any installment of such tax) for all its foreign partners. See § 1.1446-6(c)(1)(ii) for an exception to this rule when a nonresident alien partner certifies to the partnership that the partnership investment is the nonresident alien partner's only activity giving rise to effectively connected items.

  (G) Application of section 6655(i). If a partnership has a taxable year of less than 12 months, the partnership is required to pay 1446 tax (including installments of such tax) in accordance with this section § 1.1446-3, if the partnership has ECTI allocable under section 704 to foreign partners. In such a case, the partnership shall adjust its installment payments of 1446 tax in a reasonable manner (e.g., the annualized amounts of ECTI estimated to be allocable to a foreign partner, and the section 6655(e)(2)(B)(ii) percentage to be applied to each installment) to account for the short-taxable year. However, if the partnership's taxable year is a period of less than 4 months, the partnership shall not be required to make installment payments of 1446 tax, but will only be required to file Forms 8804 and 8805 in accordance with this section § 1.1446-3, and report and pay the appropriate 1446 tax for the short-taxable year.

  (H) Current year tax safe harbor. The safe harbor set forth in section 6655(d)(1)(B)(i) shall apply to a partnership subject to section 1446.

  (I) Prior year tax safe harbor. The safe harbor set forth in section 6655(d)(1)(B)(ii) shall not apply and instead the safe harbor set forth in paragraph (b)(3) of this section applies.

  (3) 1446 tax safe harbor—(i) In general. The addition to tax under section 6655 shall not apply to a partnership with respect to a current installment of 1446 tax if—

  (A) The average of the amount of the current installment and prior installments during the taxable year is at least 25 percent of the total 1446 tax (without regard to § 1.1446-6) for the prior taxable year;

  (B) The prior taxable year consisted of twelve months;

  (C) The partnership timely files (including extensions) an information return under section 6031 for the prior year; and

  (D) The amount of ECTI for the prior taxable year is not less than 50 percent of the ECTI shown on the annual return of section 1446 withholding tax that is (or will be) timely filed for the current year.

  (ii) Permission to change to standard annualization method. Except as otherwise provided in this paragraph (b)(3)(ii), if a partnership decides to pay its 1446 tax for the first installment period based upon the safe harbor method set forth in paragraph (b)(3)(i), the partnership must use the safe harbor method for each installment payment made during the partnership's taxable year. Notwithstanding the previous sentence, if a partnership paying over 1446 tax during the taxable year pursuant to this paragraph (b)(3) determines during an installment period (based upon the standard option annualization method set forth in section 6655(e) and the regulations thereunder, as modified by the forms and instructions to Forms 8804, 8805, and 8813) that it will not qualify for the safe harbor in this paragraph (b)(3) because the prior year's ECTI will not meet the 50-percent threshold in paragraph (b)(3)(i)(D) of this section, then the partnership is permitted, without being subject to the addition to the tax under section 6655 (as applied through this section), to pay over its 1446 tax for the period in which such determination is made, and all subsequent installment periods during the taxable year, using the standard option annualization method. A change pursuant to this paragraph shall be disclosed in a statement attached to the Form 8804 the partnership files for the taxable year and shall include information to allow the IRS to determine whether the change was appropriate.

  (c) Coordination with other withholding rules—(1) Fixed or determinable, annual or periodical income. Fixed or determinable, annual or periodical income subject to tax under section 871(a) or section 881 is not subject to withholding under section 1446, and such income is subject to the withholding requirements of sections 1441 and 1442 and the regulations thereunder.

  (2) Real property gains—(i) Domestic partnerships. Except as otherwise provided in this paragraph (c)(2), a domestic partnership that is otherwise subject to the withholding requirements of sections 1445 and 1446 will be subject to the payment and reporting requirements of section 1446 only and not section 1445(e)(1) and the regulations thereunder, with respect to partnership gain from the disposition of a U.S. real property interest (as defined in section 897(c)). A partnership that has complied with the requirements of section 1446 will be deemed to satisfy the withholding requirements of section 1445 and the regulations thereunder. However, a domestic partnership that would otherwise be exempt from section 1445 withholding by operation of a nonrecognition provision must continue to comply with the requirements of § 1.1445-5(b)(2). In the event that amounts are withheld under section 1445(e) at the time of the disposition of a U.S. real property interest, such amounts may be credited against the partnership's 1446 tax. A partnership that fails to comply fully with the requirements of section 1446 pursuant to this paragraph (c)(2) shall be liable for any unpaid 1446 tax and subject to any applicable addition to the tax, interest, and penalties under section 1446. See § 1.1446-4(f)(4) for rules coordinating the withholding liability of publicly traded partnerships under sections 1445 and 1446.

  (ii) Foreign partnerships. A foreign partnership that is subject to withholding under section 1445(a) during its taxable year may credit the amount withheld under section 1445(a) against its section 1446 tax liability for that taxable year only to the extent such amount is allocable to foreign partners.

  (3) Coordination with section 1443. A partnership that has ECTI allocable under section 704 to a foreign organization described in section 501(c) shall be required to pay 1446 tax on such ECTI only to the extent such ECTI is includible under section 512 and section 513 in computing the organization's unrelated business taxable income. The certificate procedure available under § 1.1441-9(b)(1) by which a partner may set forth the amounts it believes will and will not be includible in its computation of unrelated business taxable income under section 512 and section 513 shall also apply to a partner in a partnership subject to section 1446. Such certificate shall be made by a partner in the same manner as under § 1.1441-9(b)(2). A partnership that determines that the partner's certificate as to certain partnership items is unreliable or lacking must presume, consistent with § 1.1441-9(b)(3) (regarding amounts includible under section 512 in computing the organization's unrelated business taxable income), that such partnership items would be includible in computing the partner's UBTI.

  (4) Coordination with section 1446(f). A partnership that is directly or indirectly subject to withholding under section 1446(f)(1) during its taxable year may credit the amount withheld under section 1446(f)(1) against its section 1446 tax liability for that taxable year only to the extent the amount is allocable to foreign partners.

  (d) Reporting and crediting the 1446 tax—(1) Reporting 1446 tax. This paragraph (d) sets forth the rules for reporting and crediting the 1446 tax paid by a partnership. To the extent that 1446 tax is paid on ECTI allocable to a domestic trust (including a grantor or other person treated as an owner of a portion of such trust) or a grantor or other person treated as the owner of a portion of a foreign trust, the rules of this paragraph (d) applicable to a foreign trust or its beneficiaries shall be applied to such domestic or foreign trust and its beneficiaries or owners, as applicable, so that appropriate credit for the 1446 tax may be claimed by the trust, beneficiary, grantor, or other person.

  (i) Reporting of installment tax payments and notification to partners of installment tax payments. Each partnership required to make an installment payment of 1446 tax must file Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446),” in accordance with the instructions to that form. Form 8813 is generally used to transmit an installment payment of 1446 tax to the IRS with respect to partnership ECTI estimated to be allocated to foreign partners. However, see § 1.1446-6(d)(3) (relating to circumstances where a partnership must file Form 8813 when no payment is required under section 1446). Except as provided in this section, a partnership must notify each foreign partner of the 1446 tax paid on the partner's behalf when the partnership makes an installment payment of 1446 tax. The notice required to be given to a foreign partner under the previous sentence must be provided within 10 days of the installment payment due date, or, if paid later, the date such installment payment is made. A foreign partner generally may credit an installment of 1446 tax paid by the partnership on the partner's behalf against the partner's estimated tax that the partner must pay during the partner's own taxable year. See § 1.1446-5(b) (relating to tiered partnership structures). However, a foreign partner may not obtain an early refund of such amounts under the estimated tax rules. See § 1.1446-3(b)(2)(v)(B). See paragraph (d)(2) of this section for the amount of 1446 tax a partner may credit against its U.S. income tax liability. No particular form is required for a partnership's notification to a foreign partner, but each notification must include the partnership's name, the partnership's Taxpayer Identification Number (TIN), the partnership's address, the partner's name, the partner's TIN, the partner's address, the annualized ECTI estimated to be allocated to the foreign partner (or prior year's safe harbor amount, if applicable), and the amount of tax paid on behalf of the partner for both the current and any prior installment periods during the partnership's taxable year. Notwithstanding any other provision of this paragraph (d), a withholding agent is not required to notify a partner of an installment of 1446 tax paid on the partner's behalf, unless requested by the partner, if—

  (A) The partnership's agent responsible for providing notice pursuant to this paragraph is the same person that acts as an agent of the foreign partner for purposes of filing the partner's U.S. Federal income tax return for the partner's taxable year that includes the installment payment date; or

  (B) The partnership has at least 500 foreign partners and the total 1446 tax that the partnership determines will be required to be paid for the partnership taxable year on behalf of such partner (based on paragraph (b)(2)(ii) or (3) of this section) with respect to the partner's allocable share of ECTI is less than $1,000.

  (ii) Payment due dates. The 1446 tax is calculated based on partnership ECTI allocable under section 704 to foreign partners during the partnership's taxable year, as determined under section 706. Installment payments of the 1446 tax generally must be made during the partnership's taxable year in which such income is derived. A partnership must pay to the Internal Revenue Service a portion of its estimated annual 1446 tax in installments on or before the 15th day of the fourth, sixth, ninth, and twelfth months of the partnership's taxable year as provided in section 6655. Any additional amount determined to be due is to be paid with the filing of the annual return of tax required under paragraph (d)(1)(iii) of this section and clearly designated as for the prior taxable year. Form 8813 should not be submitted for a payment made under the preceding sentence.

  (iii) Annual return and notification to partners. Every partnership (except a publicly traded partnership subject to § 1.1446-4) that has effectively connected gross income for the partnership's taxable year allocable under section 704 to one or more of its foreign partners (or is treated as having paid 1446 tax under § 1.1446-5(b)), must file Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446).” Additionally, every partnership that is required to file Form 8804 also must file Form 8805, “Foreign Partner's Information Statement of Section 1446 Withholding Tax,” for each of its foreign partners on whose behalf it paid 1446 tax, and furnish Form 8804 and the Forms 8805 to the Internal Revenue Service and the respective Form 8805 to each of its partners. Notwithstanding the previous sentence, a partnership that considers a foreign partner's certificate under § 1.1446-6 when computing its 1446 tax on Form 8804 is required to furnish such partner and the Internal Revenue Service a Form 8805, even if the form submitted to the partner shows no payment of 1446 tax on behalf of the partner. Forms 8804 and 8805 are separate from Form 1065, “U.S. Return of Partnership Income,” and the attachments thereto, and are not to be filed as part of the partnership's Form 1065. A partnership must generally file Forms 8804 and 8805 on or before the due date for filing the partnership's Form 1065. See § 1.6031(a)-1(c) for rules concerning the due date of a partnership's Form 1065. However, with respect to partnerships described in § 1.6081-5(a)(1), Forms 8804 and 8805 are not due until the 15th day of the sixth month following the close of the partnership's taxable year.

  (iv) Information provided to beneficiaries of foreign trusts and estates. A foreign trust or estate that is a partner in a partnership subject to withholding under section 1446 shall be provided Form 8805 by the partnership. The foreign trust or estate must provide to each of its beneficiaries a copy of the Form 8805 furnished by the partnership. In addition, the foreign trust or estate must provide a statement for each of its beneficiaries to inform each beneficiary of the amount of the credit that may be claimed under section 33 (as determined under this section) for the 1446 tax paid by the partnership. Until an official Internal Revenue Service form is available, the statement from a foreign trust or estate that is described in this paragraph (d)(1)(iv) shall contain the following information—

  (A) Name, address, and TIN of the foreign trust or estate;

  (B) Name, address, and TIN of the partnership;

  (C) The amount of the partnership's ECTI allocated to the foreign trust or estate for the partnership taxable year (as shown on the Form 8805 provided to the trust or estate);

  (D) The amount of 1446 tax paid by the partnership on behalf of the foreign trust or estate (as shown on Form 8805 to the trust or estate);

  (E) Name, address, and TIN of the beneficiary of the foreign trust or estate;

  (F) The amount of the partnership's ECTI allocated to the trust or estate for purposes of section 1446 that is to be included in the beneficiary's gross income; and

  (G) The amount of 1446 tax paid by the partnership on behalf of the foreign trust or estate that the beneficiary is entitled to claim on its return as a credit under section 33.

  (v) Attachments required of foreign trusts and estates. The statement furnished to each foreign beneficiary under this paragraph (d)(1) must also be attached to the foreign trust or estate's U.S. Federal income tax return filed for the taxable year that includes the installment periods to which the statement relates.

  (vi) Attachments required of beneficiaries of foreign trusts and estates. The beneficiary of the foreign trust or estate must attach the statement provided by the trust or estate pursuant to paragraph (d)(1)(iv) of this section, along with a copy of the Form 8805 furnished by the partnership to such trust or estate, to its U.S. income tax return for the year in which it claims a credit for the 1446 tax. See § 1.1446-3(d)(2)(ii) for additional rules regarding a partner or beneficial owner claiming a credit for the 1446 tax.

  (vii) Information provided to beneficiaries of foreign trusts and estates that are partners in certain publicly traded partnerships. A statement similar to the statement required by paragraph (d)(1)(iv) of this section shall be provided by trusts or estates that hold interests in publicly traded partnerships subject to § 1.1446-4.

  (2) Crediting 1446 tax against a partner's U.S. tax liability—(i) In general. A partnership's payment of 1446 tax on the portion of ECTI allocable to a foreign partner generally relates to the partner's U.S. income tax liability for the partner's taxable year in which the partner is subject to U.S. tax on that income. Subject to paragraphs (d)(2)(ii) and (iii) of this section, a partner may claim as a credit under section 33 the 1446 tax paid by the partnership with respect to ECTI allocable to that partner. The partner may not claim an early refund of these amounts under the estimated tax rules. See paragraph (d)(1)(i) of this section regarding a partner's ability to credit an installment of 1446 tax paid on the partner's behalf against the partner's estimated tax payments due for the taxable year. See also § 1.1446-5(b) (relating to tiered partnership structures).

  (ii) Substantiation for purposes of claiming the credit under section 33. A partner may credit the amount paid under section 1446 with respect to such partner against its U.S. income tax liability only if it attaches proof of payment to its U.S. income tax return for the partner's taxable year in which the items comprising such partner's allocable share of partnership ECTI are included in the partner's income. Except as provided in the next sentence, proof of payment consists of a copy of the Form 8805 the partnership provides to the partner (or in the case of a beneficiary of a foreign trust or estate, the statement required under paragraph (d)(1)(iv) or (vii) of this section to be provided by such trust or estate and a copy of the related Form 8805 furnished to such trust or estate), but only if the name and TIN on the Form 8805 (or the statement provided by a foreign trust or estate) match the name and TIN on the partner's U.S. tax return, and such form (or statement) identifies the partner (or beneficiary) as the person entitled to the credit under section 33. In the case of a partner of a publicly traded partnership that is subject to withholding on distributions under § 1.1446-4, proof of payment consists of a copy of the Form 1042-S, “Foreign Person's U.S. Source Income Subject to Withholding,” provided to the partner by the partnership.

  (iii) Special rules for apportioning the tax credit under section 33—(A) Foreign trusts and estates. Section 1446 tax paid on the portion of ECTI allocable under section 704 to a foreign trust or estate that the foreign trust or estate may claim as a credit under section 33 shall bear the same ratio to the total 1446 tax paid on behalf of the trust or estate as the total ECTI allocable to such trust or estate and not distributed (or treated as distributed) to the beneficiaries of such trust or estate, and, accordingly not deducted under section 651 or section 661 in calculating the trust or estate's taxable income, bears to the total ECTI allocable to such trust or estate. The 1446 tax that a foreign trust or estate is not entitled to claim as a credit under this paragraph (d)(2) may be claimed as a credit by the beneficiary of such trust or estate that includes the partnership ECTI allocated to the trust or estate in gross income under section 652 or section 662 (whether distributed or deemed to be distributed and with the same character as effectively connected income as in the hands of the trust or estate). In the case of a foreign trust or estate with multiple beneficiaries, each beneficiary may claim a portion of the 1446 tax that may be claimed by all beneficiaries under the previous sentence as a credit in the same proportion as the amount of ECTI included in such beneficiary's gross income bears to the total amount of ECTI included by all beneficiaries. The trust or estate must provide each beneficiary with a copy of the Form 8805 provided to it by the partnership and prepare the statement required by paragraph (d)(1)(iv) of this section.

  (B) Use of domestic trusts to circumvent section 1446. This paragraph (d)(2)(iii)(B) shall apply if a partnership knows or has reason to know that a foreign person holds its interest in the partnership through a domestic trust, and such domestic trust was formed or availed of with a principal purpose of avoiding the 1446 tax. The use of a domestic trust may have a principal purpose of avoiding the 1446 tax even though the tax avoidance purpose is outweighed by other purposes when taken together. In such case, a partnership is required to pay 1446 tax under this paragraph as if the domestic trust was a foreign trust for purposes of section 1446 and the regulations thereunder. Accordingly, all applicable additions to the tax, interest, and penalties shall apply to the partnership for its failure to pay 1446 tax under this paragraph (d)(2)(iii)(B), commencing with the installment period during which the partnership knows or has reason to know that this paragraph (d)(2)(iii)(B) applies. A publicly traded partnership within the meaning of § 1.1446-4 (or a nominee required to pay 1446 tax under § 1.1446-4) will not be considered to know or have reason to know a domestic trust is being used to avoid the 1446 tax under this paragraph (d)(2)(iii)(B), provided the interest held in such entity by the domestic trust is publicly traded.

  (iv) Refunds to withholding agent. A withholding agent (i.e., the partnership) may obtain a refund of the 1446 tax paid (or deemed paid under § 1.1446-5(b)) to the extent of the excess of the amount paid to the Internal Revenue Service by the partnership, over the partnership's section 1446 tax liability as determined by the sum of the total tax creditable to each partner indicated on all Forms 8805 for the taxable year. If a partnership issues Form 8805 to a partner, then the partnership may not claim a refund for any amount of tax shown on that form as paid on behalf of the partner. If a partnership incorrectly withholds upon a United States person under section 1446 of the Internal Revenue Code and issues a Form 8805 to that person, the partnership may not file for a refund of the amount incorrectly withheld. Instead, the United States person may file for a refund of that amount on its annual return. For rules concerning refunds to withholding agents who pay 1446 tax on distributions of effectively connected income or gain under § 1.1446-4 (i.e., publicly traded partnerships or nominees), see § 1.1464-1.

  (v) 1446 tax treated as cash distribution to partners. Except as otherwise provided in this paragraph (d)(2)(v), a partnership's payment of 1446 tax on behalf of a foreign partner is treated under section 1446(d) and this section as a deemed distribution of money to the partner on the earliest of the day on which the partnership paid the tax, the last day of the partnership's taxable year for which the amount was paid, or the last day on which the partner owned an interest in the partnership during the taxable year for which the tax was paid. However, a deemed distribution of money under section 1446(d) resulting from a partnership's installment payment of 1446 tax on behalf of a partner is treated as an advance or drawing of money under § 1.731-1(a)(1)(ii) to the extent of the partner's distributive share of income for the partnership taxable year. The rule treating a deemed distribution as an advance or drawing of money under this paragraph (d)(2)(v) applies only for purposes of determining the tax results of the deemed distribution to the partner under sections 705, 731, and 733, and does not affect the date that the partnership is considered to have paid any installment of 1446 tax for purposes of section 6655 (as applied through this section) or the date a foreign partner is deemed to have paid estimated tax by reason of such installment payment. See paragraph (d)(1)(i) of this section (permitting a partner to credit 1446 tax paid on the partner's behalf against the partner's estimated tax obligation). An amount treated as an advance or drawing of money is taken into account at the end of the partnership taxable year or the last day during the partnership's taxable year on which the partner owned an interest in the partnership. Any 1446 tax paid after the close of the partnership's taxable year, including amounts paid with the filing of Form 8804, that are on account of partnership ECTI allocated to partners for the prior taxable year shall be treated under section 1446(d) and this section as a distribution from the partnership on the earlier of the last day of the partnership's prior taxable year for which the tax is paid, or the last day in such prior taxable year on which such foreign partner held an interest in the partnership.

  (vi) Examples. The following examples illustrate the application of this section. In considering the examples, disregard the potential application of paragraph (b)(2)(v)(F) of this section (relating to the de minimis exception to paying 1446 tax). The examples are as follows:

  (A) Example 1: Simple trust that reports entire amount of ECTI. PRS is a partnership that has two partners, FT, a foreign trust, and A, a U.S. person. FT is a simple trust under section 651. FT and A each provide PRS with a valid Form W-8BEN and Form W-9, respectively. FT has one beneficiary, NRA, a nonresident alien. PRS and FT each maintain a calendar taxable year. PRS estimated for each installment period during the partnership's taxable year that FT would be allocated $100 of ECTI for the taxable year, and that all such ECTI would be ordinary in character. Assume that the allocation of the $100 would be respected under section 704(b) and the regulations thereunder. PRS pays installments of 1446 tax based upon its estimates and timely pays a total of $37 of 1446 tax over the course of the partnership's taxable year ($100 ECTI × .37). Assume that PRS' estimates of ECTI allocable to FT during the taxable year equal the actual amount of ECTI allocable to FT for the taxable year. Assume also that FT's only income for the taxable year is the $100 of income from PRS, and that, pursuant to the terms of the trust's governing instrument and local law, the $100 of ECTI is not included in FT's fiduciary accounting income and the deemed distribution of the $37 withholding tax paid under paragraph (d)(2)(v) of this section is not included in FT's fiduciary accounting income. Accordingly, the $100 of ECTI is not income required to be distributed by FT, and FT may not claim a deduction under section 651 for this amount. FT must report the $100 of ECTI in its gross income and may claim a credit under section 33 as determined under paragraph (d)(2)(iii) of this section of $37 for the 1446 tax paid by PRS. NRA is not required to include any of the ECTI in gross income and accordingly may not claim a credit for any amount of the $37 of 1446 tax PRS paid.

  (B) Example 2: Simple trust that distributes a portion of ECTI to the beneficiary. Assume the same facts as in paragraph (d)(2)(vi)(A) of this section (Example 1), except that PRS distributes $60 to FT, which FT includes in its fiduciary accounting income under local law. FT will report the $100 of ECTI in its gross income and may claim a deduction for the $60 required to be distributed under section 651(a) to NRA. Pursuant to paragraph (d)(2)(iii) of this section, FT may claim a $14.8 credit under section 33 for the 1446 tax PRS paid ($40/$100 multiplied by $37). NRA is required to include the $60 of the ECTI in gross income under section 652 (as ECTI) and may claim a $22.2 credit under section 33 for the 1446 tax PRS paid ($37 less $14.8 or $60/$100 multiplied by $37).

  (C) Example 3: Complex trust that distributes entire ECTI to the beneficiary. Assume the same facts as in paragraph (d)(2)(vi)(A) of this section (Example 1), except that FT is a complex trust under section 661. PRS distributes $60 to FT, which FT includes in its fiduciary accounting income. FT distributes the $60 of fiduciary accounting income to NRA and also properly distributes an additional $40 to NRA from FT's principal. FT will report the $100 of ECTI in its gross income and may deduct the $60 required to be distributed to NRA under section 661(a)(1) and may deduct the $40 distributed to NRA under section 661(a)(2). Pursuant to paragraph (d)(2)(iii) of this section, FT may not claim a credit under section 33 for any of the $37 of 1446 tax paid by PRS. NRA is required to include $100 of the ECTI in gross income under section 662 (as ECTI) and may claim a $37 credit under section 33 for the 1446 tax paid by PRS ($37 less $0).

  (e) Liability of partnership for failure to withhold—(1) In general. Every partnership required to pay 1446 tax is made liable for that tax by section 1461. Therefore, a partnership that is required to pay 1446 tax but fails to do so, or pays less than the amount required under this section, is liable under section 1461 for the payment of the tax required to be withheld under chapter 3 of the Internal Revenue Code and the regulations thereunder unless, and to the extent, the partnership can demonstrate pursuant to paragraph (e)(2) of this section, to the satisfaction of the Commissioner or his delegate, that a foreign partner has paid the full amount of tax required to be paid by such partner to the Internal Revenue Service. See paragraph (e)(3) of this section and section 1463 regarding a partnership's liability for penalties and interest even though a foreign partner has satisfied the underlying tax liability. See also § 1.1461-3 for applicable penalties when a partnership fails to pay 1446 tax. See paragraph (b) of this section for an addition to the tax under section 6655 when there is an underpayment of 1446 tax.

  (2) Proof that tax liability has been satisfied and deemed payment of 1446 tax. Proof of payment of tax may be established for purposes of paragraph (e)(1) of this section consistent with § 1.1445-1(e)(3). Under that standard, a partnership must provide sufficient information to the IRS to determine that the partner's tax liability was satisfied or established to be zero in accordance with the rules of this section. Under this section, a partnership's liability for 1446 tax shall be deemed to have been satisfied (deemed payment), to the extent of the 1446 tax due with respect to the ECTI allocable to a foreign partner, on the later of the date that such partner is considered to have paid all tax that is required to be shown on such partner's U.S. income tax return under section 6513(a) and (b)(2) (prescribing the date tax is considered paid for purposes of sections 6511(b)(2), (c), and 6512), or the last date for payment of the 1446 tax without extensions (the unextended due date for Form 8804). The deemed payment rule of this paragraph (e)(2) shall apply for purposes sections of 1446, 1461, and 1463, and any additions to the tax, interest, or penalties potentially applicable to such partnership under section 1446, including sections 6601, 6651, and 6655. Any deemed payment of 1446 tax under this paragraph (e)(2) shall not be treated as a deemed distribution under section 1446(d) and this section.

  (3) Liability for interest, penalties, and additions to the tax—(i) Partnership. Notwithstanding paragraph (e)(2) of this section, a partnership that fails to pay 1446 tax is not relieved from liability under section 6655 (as applied through this section) or for interest under section 6601, when applicable. See § 1.1463-1. Such liability may exist even if there is no underlying tax liability due from a foreign partner on its allocable share of partnership ECTI. The addition to the tax under section 6655 or the interest charge under section 6601 that is required by those sections shall be imposed as set forth in those sections, as modified by this section. The section 6601 interest charge shall accrue beginning on the last date prescribed for payment of the 1446 tax due under section 1461 (which is the due date, without extensions, for filing Form 8804). The section 6601 interest charge shall stop accruing on the 1446 tax liability on the date, and to the extent, that the unpaid tax liability under section 1446 is satisfied (or is deemed satisfied under this paragraph (e)). Further, a partnership's liability under section 6655 (as applied through this section) for any underpaid installment payment shall accrue beginning on the relevant installment payment date, and shall stop accruing on the earlier of the date (and to the extent) that the 1446 tax liability is actually satisfied or the date prescribed in paragraph (b)(2)(v)(C) of this section. See paragraph (e)(4) of this section for examples illustrating that a partner's payment of estimated tax has no effect on the partnership's calculation of its addition to the tax under section 6655 and this section. See § 1.1461-3 for a list of the additions to tax, interest, and penalties that may apply to a partnership that fails to comply with section 1446. See § 1.1446-6(d)(2)(i) for exceptions to the application of the addition to the tax under section 6655 (as applied through this section) when a partnership reasonably relies on a foreign partner's certificate to reduce 1446 tax.

  (ii) Foreign partner. A foreign partner is permitted to reduce any addition to the tax under section 6654 or section 6655 by the amount of any section 6655 addition to the tax paid by the partnership with respect to the partnership's failure to pay adequate installment payments of the 1446 tax on ECTI allocable to the foreign partner.

  (4) Examples. The following examples illustrate the application of this section. In considering the examples, disregard the potential application of paragraph (b)(2)(v)(F) of this section (relating to the de minimis exception to paying 1446 tax). Further, in each of the examples where a partnership is deemed to have paid 1446 tax with respect to ECTI allocable to a partner, it is assumed that the partnership has presented to the IRS the appropriate information under paragraph (e)(2) of this section for the IRS to conclude that the deemed payment is appropriate. The examples are as follows:

  (i) Example 1: Foreign partnership fails to pay 1446 tax and sole foreign partner fails to pay all tax required to be shown on partner's U.S. income tax return. (A) PRS is a foreign partnership engaged in a trade or business in the United States and has two equal partners, A, a U.S. person, and B, a nonresident alien. PRS is described in § 1.6081-5(a) (PRS keeps its books and records outside the United States and Puerto Rico) and, therefore, is required to file Form 8804 by the 15th day of the 6th month following the close of its taxable year. Both partners and PRS are calendar year taxpayers. PRS has received a valid Form W-9 and W-8BEN from A and B, respectively, but has not received any other documents or certificates. B is engaged in multiple trades or businesses (including the PRS partnership) that give rise to effectively connected income. PRS will use an acceptable annualization method under this section for computing its 1446 tax.

  (B) In PRS's first year of operations (Year 1), PRS estimates for each installment period described in § 1.1446-3 that B will be allocated $100 of ordinary ECTI for the taxable year. Therefore, for each installment period PRS is required to pay one fourth of the tax on the annualized ECTI allocable to B, or $9.25 (.25 × ($100 × .37)). PRS fails to make any installment payments. PRS's operations actually result in $100 of ECTI allocated to B. Therefore, PRS was required to have paid 1446 tax of $37 on or before the due date, without extensions, for filing its Form 8804 which is June 15, Year 2 (the last date prescribed for payment of the 1446 tax). PRS does not file Forms 8804 or 8805.

  (C) B pays estimated taxes and makes the following payments on the following dates: June 15, Year 1—$20, September 15, Year 1—$15, and January 15, Year 2—$10. B's total estimated tax payments equal $45. B files its U.S. Federal income tax return timely on June 15, Year 2, and reports all effectively connected income required to be shown on its return. Assume that B's total correct tax liability as shown on the return is $50. B does not make a payment with its return and so B still owes $5 to the Internal Revenue Service (excluding any interest, penalties, and additions to the tax that may apply). Assume that B is not subject to an addition to the tax under section 6654.

  (D) Under the rules of paragraph (e)(2) of this section, for purposes of sections 1446, 1461, and 1463, PRS is not considered to have paid any 1446 tax because B has not paid all of B's U.S. income tax liability.

  (E) Further, under the principles of section 6655 and the rules of § 1.1446-3(e), a partner's estimated tax payments will not affect the calculation of a partnership's addition to the tax. Accordingly, PRS will be liable under the principles of section 6655 and § 1.1446-3 for failing to withhold for each installment payment. The addition to the tax will accrue beginning with the due date of each installment payment on the $9.25 underpayment for each respective installment period and will continue to accrue until June 15, Year 2 (the date prescribed in paragraph (b)(2)(v)(C) of this section).

  (F) Further, beginning on June 15, Year 2 (the last date prescribed for payment of 1446 tax without extensions), PRS will be liable for interest under section 6601 with respect to the unpaid 1446 tax, $37. This interest will stop accruing on the earlier of the date that the 1446 tax is paid by PRS or is deemed paid under paragraph (e)(2) of this section by reason of B's payment of its full tax liability.

  (G) Further, beginning on June 15, Year 2 (the due date for filing Form 8804), PRS will be liable for the addition to the tax under section 6651(a)(1) for failing to file Form 8804. This addition to the tax accrues on the amount required to be shown as the 1446 tax liability on Form 8804, $37. This addition to the tax will accrue at the rate of 5 percent per month until the date that PRS files Form 8804 for Year 1, or the maximum accrual of the penalty (25 percent of the tax required to be shown on the return) under that section has been reached.

  (H) PRS may be liable for other penalties and additions to the tax for its failure to withhold or to furnish statements to its foreign partner B. See § 1.1461-3 for a list of the penalties that may apply.

  (ii) Example 2: Foreign partnership fails to pay 1446 tax but sole foreign partner pays all tax required to be shown on the partner's U.S. income tax return. The facts are the same as paragraph (e)(4)(i)(A) of this section (Example 1), except that B pays $5 with the filing of B's return and has therefore paid all tax required to be shown on B's return within the meaning of paragraph (e)(2) of this section.

  (A) For purposes of sections 1446, 1461, and 1463, PRS is deemed to have paid its 1446 tax liability under paragraph (e)(2) of this section as of the later of the date that B is considered to have paid its tax under section 6513(a) and (b)(2) (June 15, Year 2) and the last date for PRS to pay its 1446 tax without extensions (also June 15, Year 2). Therefore, PRS is deemed to have paid all of its 1446 tax liability as of June 15, Year 2. PRS has no continuing liability for 1446 tax under section 1461, however, additions to the tax, interest, and penalties may apply.

  (B) For purposes of section 6655 and § 1.1446-3, under paragraph (e)(2) PRS is deemed to have paid its 1446 tax on June 15, Year 2. Even if B had fully paid its tax liability as of March 15, Year 2, the rule in paragraph (e)(2) of this section would not deem PRS to have paid its 1446 tax until June 15, Year 2. As a result, B's estimated tax payments will have no effect on PRS's calculation of its addition to the tax. The addition to the tax under 6655 and § 1.1446-3 shall begin to accrue on each installment date with respect to the underpaid installment ($8.75), and will stop accruing on June 15, Year 2, the date prescribed in paragraph (b)(2)(v)(C) of this section.

  (C) Because PRS is deemed to have paid its full 1446 tax liability as of June 15, Year 2 (the last date prescribed for payment of 1446 tax without extensions), PRS is not subject to an interest charge under section 6601, or a failure to file penalty under section 6651 (see section 6651(b)(1)).

  (D) PRS may be liable for other penalties and additions to the tax for its failure to withhold or to furnish statements to its foreign partner B. See § 1.1461-3 for a list of the penalties that may apply.

  (E) If PRS had several foreign partners, PRS would conduct the same analysis as set forth above with respect to each partner. That is, under paragraph (e) of this section, PRS may be deemed to have paid 1446 tax with respect to the ECTI allocable to some but not all of its foreign partners.

  (iii) Example 3: Domestic partnership fails to pay 1446 tax but sole foreign partner fully pays all tax required to be shown on partner's U.S. income tax return. The facts are the same as paragraph (e)(4)(ii) introductory text of this section (Example 2), except that PRS is a domestic partnership whose last date prescribed for paying 1446 tax without extensions (i.e., generally the unextended due date for Form 8804) is March 15, Year 2.

  (A) For purposes of sections 1446, 1461, and 1463, PRS is deemed to have paid its 1446 tax liability on the later of the date that B is considered to have paid tax under section 6513(a) and (b)(2) (June 15, Year 2) and the last date for paying 1446 tax without extensions (i.e., the unextended due date for Form 8804, March 15, Year 2). Accordingly, PRS is not considered to have fully paid its 1446 tax liability until June 15, Year 2. PRS has no continuing liability for 1446 tax under section 1461, however, additions to the tax, interest, and penalties may apply.

  (B) For purposes of section 6655 and § 1.1446-3, PRS is subject to an underpayment addition to the tax that accrues on the same amount as in paragraphs (e)(4)(i) and (ii) of this section (Examples 1 and 2), respectively because PRS is not deemed to have paid 1446 tax under paragraph (e)(2) of this section until June 15, Year 2. The addition to the tax will stop accruing on the date prescribed in paragraph (b)(2)(v)(C) of this section (i.e., March 15, Year 2, the due date, without extensions, for filing Form 8804).

  (C) For purposes of section 6601, as of the last date prescribed for paying 1446 tax without extensions (March 15, Year 2), PRS has not paid or been deemed to have paid any 1446 tax. Accordingly, the interest charge under section 6601 shall begin to accrue on March 15, Year 2, and shall accrue until the 1446 liability is paid or deemed to have been paid. In this case, the interest charge will accrue until June 15, Year 2, the date that PRS is deemed to have paid its 1446 tax under paragraph (e)(2) of this section.

  (D) For purposes of section 6651(a)(1), as of March 15, Year 2, PRS's amount required to be shown as tax on its Form 8804 is $37. This amount cannot be reduced under section 6651(b)(1) because PRS is not deemed to have paid 1446 tax under paragraph (e)(2) of this section until June 15, Year 2, a date falling after the last date for PRS to pay its 1446 tax, March 15, Year 2. Accordingly, the failure to file penalty will begin to accrue on March 15, Year 2 (filing due date for Form 8804), and shall stop accruing on the earlier of the date that PRS files Form 8804 or the maximum accrual of the penalty (25 percent of the amount required to be shown as tax on the return) is reached.

  (E) PRS may be liable for other penalties and additions to the tax for its failure to withhold or to furnish statements to its foreign partner B. See § 1.1461-3 for a list of the penalties that may apply.

  (f) Effect of withholding on partner. The payment of the 1446 tax by a partnership does not excuse a foreign partner to which a portion of ECTI is allocable from filing a U.S. tax or informational return, as appropriate, with respect to that income. Information concerning installment payments of 1446 tax paid during the partnership's taxable year on behalf of a foreign partner shall be provided to such foreign partner in accordance with paragraph (d) of this section and such information may be taken into account by the foreign partner when computing the partner's estimated tax liability during the taxable year. Form 1040NR, “U.S. Nonresident Alien Income Tax Return,” Form 1065, “U.S. Return of Partnership Income,” Form 1120F, “U.S. Income Tax Return of a Foreign Corporation,” or such other return as appropriate, must be filed by the partner, and any tax due must be paid, by the filing deadline (including extensions) generally applicable to such person. Pursuant to paragraph (d) of this section, a partner may generally claim a credit under section 33 for its share of any 1446 tax paid by the partnership against the amount of income tax (or 1446 tax in the case of tiers of partnerships) as computed in such partner's return. See § 1.1446-3(e)(3)(ii) for rules permitting a partner to reduce its addition to tax under section 6654 or section 6655.

• Treas. Reg. §1.1446-3(a)In general—(1) Calculating 1446 tax. Show full text ▾ Collapse ▴

  In general—(1) Calculating 1446 tax. This section provides rules for calculating, reporting, and paying over the section 1446 withholding tax (1446 tax). A partnership's 1446 tax equals the amount determined under this section and shall be paid in installments during the partnership's taxable year (see paragraph (d)(1) of this section for installment payment due dates), with any remaining tax due paid with the partnership's annual return required to be filed pursuant to paragraph (d) of this section. For these purposes, a partnership shall not take into account either a partner's liability for any other tax imposed under any other provision of the Internal Revenue Code (e.g., section 55 or 884) or a partner's distributive share of the partnership's tax credits when determining the amount of the partnership's 1446 tax.

  (2) Applicable percentage—(i) In general. Except as provided in this paragraph (a)(2), in the case of a foreign partner that is a corporation for U.S. tax purposes, the applicable percentage is the highest rate of tax specified in section 11(b) for such taxable year. Except as provided in this paragraph (a)(2) and § 1.1446-5, in the case of a foreign partner that is not a corporation for U.S. tax purposes (e.g., a partnership, individual, trust or estate), the applicable percentage is the highest rate of tax specified in section 1.

  (ii) Special types of income or gain. Except as otherwise provided, a partnership is permitted to consider as the applicable percentage under this paragraph (a)(2) the highest rate of tax applicable to a particular type of income or gain allocable to a partner (e.g., long-term capital gain allocable to a non-corporate partner, unrecaptured section 1250 gain, collectibles gain under section 1(h)), to the extent of a partner's allocable share of such income or gain. Consideration of the highest rate of tax applicable to a particular type of income or gain under the previous sentence shall be made without regard to the amount of such partner's income. A partnership is not permitted to consider the highest rate of tax applicable to a particular type of income or gain under this paragraph (a)(2)(ii) if the application of the preferential rate depends upon the corporate or non-corporate status of the person reporting the income or gain and, either no documentation has been provided to the partnership under § 1.1446-1 to establish the corporate or non-corporate status of the partner required to pay tax on the income or gain, or the partnership is otherwise required to compute and pay 1446 tax on such portion of the income or gain using the highest applicable percentage under section 1446(b). See e.g., §§ 1.1446-1(c)(3) (presumption of foreign status in the absence of documentation) and 1.1446-5(c)(2) (requirement to pay 1446 tax at higher of rates in section 1446(b) where a lower-tier partnership cannot reliably associate income with a partner of the upper-tier partnership).

• Treas. Reg. §1.1446-3(b)Installment payments—(1) In general. Show full text ▾ Collapse ▴

  Installment payments—(1) In general. Except as provided in § 1.1446-4 for certain publicly traded partnerships, a partnership must pay its 1446 tax by making installment payments of the 1446 tax based on the amount of partnership effectively connected taxable income (ECTI) allocable under section 704 to its foreign partners, without regard to whether the partnership makes any distributions to its partners during the partnership's taxable year. The amount of the installment payments is determined in accordance with this paragraph (b), and the tax must be paid at the times set forth in paragraph (d) of this section. Subject to paragraphs (b)(2)(v) and (b)(3)(ii) of this section, in computing its first installment of 1446 tax for a taxable year, a partnership must decide whether it will pay its 1446 tax for the entire taxable year by using the safe harbor set forth in paragraph (b)(3)(i) of this section, or by using one of several annualization methods available under paragraph (b)(2)(ii) of this section for computing partnership ECTI allocable to foreign partners. In the case of a partnership's underpayment of an installment of 1446 tax, the partnership shall be subject to an addition to the tax equal to the amount determined under section 6655, as modified by this section, as if such partnership were a corporation, as well as any other applicable interest and penalties. See § 1.1446-3(f). Section 6425 (permitting an adjustment for an overpayment of estimated tax by a corporation) shall not apply to a partnership's payment of its 1446 tax.

  (2) Calculation—(i) Application of the principles of section 6655—(A) In general. Installment payments of 1446 tax required during the partnership's taxable year are based upon partnership ECTI for the portion of the partnership taxable year to which the payments relate, and, except as set forth in this paragraph (b)(2) or paragraph (b)(3) of this section, shall be calculated using the principles of section 6655. The principles of section 6655, except as otherwise provided in § 1.6655-2, are applied to annualize the partnership's items of effectively connected income, gain, loss, and deduction to determine each foreign partner's allocable share of partnership ECTI. Each foreign partner's allocable share of partnership ECTI is then multiplied by the relevant applicable percentage for the type of income allocable to the foreign partner under paragraph (a)(2) of this section. The respective 1446 tax amounts are then added for each foreign partner to yield an annualized 1446 tax with respect to such partner. The installment of 1446 tax due with respect to a foreign partner equals the excess of the section 6655(e)(2)(B)(ii) percentage of the annualized 1446 tax for that partner (or, if applicable, the adjusted seasonal amount) for the relevant installment period, over the aggregate amount of 1446 tax installment payments previously paid with respect to that partner during the partnership's taxable year. The partnership's total 1446 tax installment payment equals the sum of the installment payments due for such period on behalf of all the partnership's foreign partners.

  (B) Calculation rules when certificates are submitted under § 1.1446-6. (1) To the extent applicable, in computing the 1446 tax due with respect to a foreign partner, a partnership may consider a certificate received from such partner under § 1.1446-6(c)(1)(i) or (ii) and the amount of state and local taxes permitted to be considered under § 1.1446-6(c)(1)(iii). For the purposes of applying this paragraph (b)(2)(i)(B), a partnership shall first annualize the partner's allocable share of the partnership's items of effectively connected income, gain, deduction, and loss before—

• Treas. Reg. §1.1446-3(c)Coordination with other withholding rules—(1) Fixed or determinable, annual or periodical income. Show full text ▾ Collapse ▴

  Coordination with other withholding rules—(1) Fixed or determinable, annual or periodical income. Fixed or determinable, annual or periodical income subject to tax under section 871(a) or section 881 is not subject to withholding under section 1446, and such income is subject to the withholding requirements of sections 1441 and 1442 and the regulations thereunder.

  (2) Real property gains—(i) Domestic partnerships. Except as otherwise provided in this paragraph (c)(2), a domestic partnership that is otherwise subject to the withholding requirements of sections 1445 and 1446 will be subject to the payment and reporting requirements of section 1446 only and not section 1445(e)(1) and the regulations thereunder, with respect to partnership gain from the disposition of a U.S. real property interest (as defined in section 897(c)). A partnership that has complied with the requirements of section 1446 will be deemed to satisfy the withholding requirements of section 1445 and the regulations thereunder. However, a domestic partnership that would otherwise be exempt from section 1445 withholding by operation of a nonrecognition provision must continue to comply with the requirements of § 1.1445-5(b)(2). In the event that amounts are withheld under section 1445(e) at the time of the disposition of a U.S. real property interest, such amounts may be credited against the partnership's 1446 tax. A partnership that fails to comply fully with the requirements of section 1446 pursuant to this paragraph (c)(2) shall be liable for any unpaid 1446 tax and subject to any applicable addition to the tax, interest, and penalties under section 1446. See § 1.1446-4(f)(4) for rules coordinating the withholding liability of publicly traded partnerships under sections 1445 and 1446.

  (ii) Foreign partnerships. A foreign partnership that is subject to withholding under section 1445(a) during its taxable year may credit the amount withheld under section 1445(a) against its section 1446 tax liability for that taxable year only to the extent such amount is allocable to foreign partners.

  (3) Coordination with section 1443. A partnership that has ECTI allocable under section 704 to a foreign organization described in section 501(c) shall be required to pay 1446 tax on such ECTI only to the extent such ECTI is includible under section 512 and section 513 in computing the organization's unrelated business taxable income. The certificate procedure available under § 1.1441-9(b)(1) by which a partner may set forth the amounts it believes will and will not be includible in its computation of unrelated business taxable income under section 512 and section 513 shall also apply to a partner in a partnership subject to section 1446. Such certificate shall be made by a partner in the same manner as under § 1.1441-9(b)(2). A partnership that determines that the partner's certificate as to certain partnership items is unreliable or lacking must presume, consistent with § 1.1441-9(b)(3) (regarding amounts includible under section 512 in computing the organization's unrelated business taxable income), that such partnership items would be includible in computing the partner's UBTI.

  (4) Coordination with section 1446(f). A partnership that is directly or indirectly subject to withholding under section 1446(f)(1) during its taxable year may credit the amount withheld under section 1446(f)(1) against its section 1446 tax liability for that taxable year only to the extent the amount is allocable to foreign partners.

• Treas. Reg. §1.1446-3(d)Reporting and crediting the 1446 tax—(1) Reporting 1446 tax. Show full text ▾ Collapse ▴

  Reporting and crediting the 1446 tax—(1) Reporting 1446 tax. This paragraph (d) sets forth the rules for reporting and crediting the 1446 tax paid by a partnership. To the extent that 1446 tax is paid on ECTI allocable to a domestic trust (including a grantor or other person treated as an owner of a portion of such trust) or a grantor or other person treated as the owner of a portion of a foreign trust, the rules of this paragraph (d) applicable to a foreign trust or its beneficiaries shall be applied to such domestic or foreign trust and its beneficiaries or owners, as applicable, so that appropriate credit for the 1446 tax may be claimed by the trust, beneficiary, grantor, or other person.