This article introduces readers to potential US international tax issues that a business entity may face when it elects to operate as a partnership for US tax purposes (all together “partnership international tax issues”). The focus of this article is on partnership international tax issues, particularly where US partnerships have a foreign partner and foreign partnerships have a US partner. The purpose of this article is to just identify the strategic groups of partnership international tax issues; future articles will analyze these issues in more depth.
Partnership International Tax Issues: Two Main Fact Patterns
As stated above, the partnership international tax issues outlined below concern primarily one of the following situations. First, a partnership is a US partnership and a foreign person invests in this partnership. Second, a partnership is a foreign partnership and a US person invests in this partnership.
The Internal Revenue Code (“IRC”) deals with both situations in a different manner. They are taxed differently, and a partnership and/or its partner may have to file different information returns.
Partnership International Tax Issues: Classification Issues
Three important US international tax issues exist with respect to classification of partnerships. First, classification of an entity or arrangement as a partnership. The tax classification of a partnership that is officially formed by filing appropriate organizational documents with the proper government entity is usually fairly clear. This is not the case, however, with respect to a situation where parties enter into a contractual arrangement which exhibit features similar to a partnership. In these situations the IRS may determine such a contractual arrangement to be a partnership for US tax purposes; these are so-called “contractual partnerships”.
Second, classification of a partnership as “domestic” or “foreign”. Again, the easiest cases are those that involve a formally-organized partnership, but contractual partnerships raise a lot of difficult issues.
Third, classification of a partnership as either “resident” or “non-resident”.
Partnership International Tax Issues: Issues Concerning Inbound Investments
An important set of US international tax issues arises when a foreign person invests in a US partnership. Most of these issues would arise in situations where the partnership trades or otherwise does business in the United States. The most salient issues concern: partnership formation, taxation of partnership operations, taxation of partnership distributions and sale of a partnership interest by a foreign partner. We will discuss these issues in more detail in the future.
Partnership International Tax Issues: Issues Concerning Taxation of Outbound Investments
Another highly important set of issues arises when a US person does business through a foreign partnership. The most important of these issues concern: acquisition of an interest in a foreign partnership, taxation of foreign partnership income allocated to US partners and disposition of an ownership interest in a foreign partnership.
These issues interconnect in an interesting and very complex way with such issues as income source rules, foreign tax credit, Subpart F rules and so on. The interaction of these issues may directly affect taxation of foreign income of a US partner. In future articles, we will cover this very diverse set of partnership international tax issues concerning taxation of outbound investments.
Partnership International Tax Issues: Tax Withholding Issues
US international tax law subjects domestic partnerships to a great variety of tax withholding rules whenever they have foreign partners with effectively connected income. Most common of these rules are the ones that concern partnership distributions to a foreign partner. Another very common example is Foreign Investment in Real Property Tax Act of 1980, commonly known as “FIRPTA”, tax withholding requirements. Again, we will cover these tax withholding issues as well as the problem of “effectively connected income” in future articles.
Partnership International Tax Issues: Tax Treaties
Bilateral tax treaties form an important part of US international tax law concerning taxation of partnerships. Partnership taxation is affected by a host of tax treaty issues. For example, the treatment of “hybrid” and “reverse hybrid” entities, tax treaty benefits and the issue of “imputed” permanent establishment are all highly important tax treaty issues that directly affect partnership taxation under US tax law. In future article, we will discuss selected tax treaties as well as certain features common to most US tax treaties.
Partnership International Tax Issues: Information Returns and Income Tax Returns
Numerous tax filing requirements are imposed on partnerships, especially US partners of foreign partnerships. The most salient information returns are those required by the Internal Revenue Code (“IRC”) Sections 6031, 6038 and 6046A. There is also an important interaction of these sections with information returns under the IRC Sections 6038A and 6038C. We will cover the partnership information and income tax returns in future articles.
Contact Sherayzen Law Office for Professional Help Concerning Partnership International Tax Issues
If you are a US person who owns an interest in a foreign partnership or a foreign person who owns an interest in a US partnership, contact Sherayzen Law Office for professional help. Our highly-experienced international tax team, headed by attorney Eugene Sherayzen, will help you identify your US international tax compliance issues and help you resolve them.
If you are facing an IRS audit concerning partnership international tax issues, call us as soon as possible to obtain the maximum benefit from our advice.