Section 1446 — Partnership Withholding on Foreign Partners

What Is Section 1446?

Section 1446 of the Internal Revenue Code requires a partnership that has effectively connected taxable income (ECTI) and one or more foreign partners to withhold tax on the portion of that ECTI allocable to its foreign partners. This withholding serves as a prepayment of the foreign partner’s US income tax liability.

The purpose of Section 1446 is to ensure that the IRS collects tax from foreign partners who may not otherwise file a US return or who may be difficult to reach for collection. The partnership acts as the withholding agent and is liable for the tax if it fails to withhold properly.

When Does It Apply?

Section 1446 withholding applies when both of the following conditions are met:

1. The partnership has effectively connected taxable income (ECTI) for the tax year
2. One or more of the partners is a foreign person (nonresident alien individual, foreign corporation, foreign partnership, foreign trust, or foreign estate)

Withholding Rates

The withholding rate depends on the type of foreign partner:

These rates represent the highest marginal tax rates for each category. The 37% rate is the top individual rate, and 21% is the flat corporate rate. The partnership must use these rates unless a Form 8804-C certificate is provided by the partner.

Quarterly Payment Schedule

The partnership must make quarterly withholding tax payments using Form 8813, “Partnership Withholding Tax Payment Voucher (Section 1446).” The quarterly installment due dates for calendar-year partnerships are:

Each installment is based on the partnership’s estimate of ECTI allocable to foreign partners for the year. The partnership should use an annualization method to estimate the ECTI for each quarter.

Annual Return — Form 8804

At the end of the tax year, the partnership files Form 8804, “Annual Return for Partnership Withholding Tax (Section 1446).” This return reconciles the quarterly payments made via Form 8813 with the actual Section 1446 tax liability for the year. Form 8804 is due on the same date as Form 1065 — March 15 for calendar-year partnerships. Any balance due must be paid with Form 8804, and any overpayment can be applied to the next year or refunded.

Partner Statements — Form 8805

The partnership must prepare a Form 8805, “Foreign Partner’s Information Statement of Section 1446 Withholding Tax,” for each foreign partner. Form 8805 shows the partner’s allocable share of ECTI and the amount of Section 1446 tax withheld on their behalf. Copies are attached to Form 8804 when filed with the IRS, and a copy must be furnished to each foreign partner so they can claim credit for the withholding on their US tax return.

Form 8804-C — Certificate to Reduce Withholding

A foreign partner who expects their actual tax liability to be lower than the statutory withholding rate can submit Form 8804-C to the partnership. This certificate provides information about the partner’s expected deductions, losses, and credits that would reduce their effective tax rate.

Penalties for Failure to Withhold

If the partnership fails to withhold under Section 1446, it is liable for the tax that should have been withheld, plus:

• Interest on the underpayment from the date the tax was due
• Addition to tax for failure to pay estimated tax (similar to the individual estimated tax penalty)
• Penalties under Section 6651 for failure to file Form 8804 or failure to pay the tax shown on the return
• Potential penalties on the responsible persons under the trust fund recovery penalty provisions

Interaction with Form 1065 and K-1

Section 1446 withholding is closely tied to Form 1065. The ECTI reported on Form 1065 determines the withholding base. Each foreign partner’s Schedule K-1 should reflect their share of ECTI, and the Section 1446 tax withheld is reported on the K-1 (Box 16, code Y in recent years). The amounts on Form 8805 must be consistent with the K-1 allocations. Any discrepancy between the Form 1065, K-1, Form 8804, and Form 8805 will draw IRS scrutiny.

How Foreign Partners Claim Credit

Foreign partners claim credit for Section 1446 withholding on their US tax returns:

• Nonresident alien individuals claim the credit on Form 1040-NR as a payment against their tax liability
• Foreign corporations claim the credit on Form 1120-F

The partner attaches a copy of Form 8805 received from the partnership to their return as evidence of the withholding. If the withholding exceeds the partner’s actual tax liability, the excess is refundable.

TIN Requirements for Foreign Partners

Each foreign partner must have a US taxpayer identification number (TIN) for the partnership to properly report withholding. For individuals, this is typically an ITIN (Individual Taxpayer Identification Number) obtained by filing Form W-7. For foreign corporations, it is an EIN (Employer Identification Number).

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