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(a) is to collect tax from foreign partners on allocable ECTI. The partnership acts as the withholding agent and is liable for the tax if it fails to withhold properly. This guide focuses on Section 1446(a); withholding on transfers of partnership interests under Section 1446(f) and publicly traded partnership distributions has separate triggers and reporting mechanics.

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:

The applicable percentage is 21% for corporate partners and generally 37% for noncorporate foreign partners. In some circumstances, the partnership may use the highest preferential rate for a documented category of income allocable to a qualifying noncorporate partner. A valid Form 8804-C and permitted state or local income-tax reductions can also affect the calculation; publicly traded partnerships follow separate rules and cannot use preferential rates for this purpose.

Quarterly Payment Schedule

A partnership with Section 1446(a) tax must make installment payments during the year. Form 8813 is the payment voucher for this regime; current IRS electronic-payment options and voucher rules should be checked before submission. The installment due dates for a calendar-year partnership are:

Each installment is based on the partnership’s estimate of ECTI allocable to foreign partners for the year. The partnership must also notify affected foreign partners within 10 days of the installment due date or, if paid, the payment date, subject to the exceptions in the regulations.

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. It is generally due by the 15th day of the third month after year-end (March 15 for a calendar-year partnership). A partnership that keeps its books and records outside the United States and Puerto Rico generally has until the 15th day of the sixth month and checks the applicable box on Form 8804. Any balance due must be paid with the return; an overpayment may be applied or refunded under the current instructions.

Form 8804 Refunds and Direct Deposit

If Form 8804 shows an overpayment and the partnership wants a refund, the current IRS instructions say to complete lines 14b, 14c, and 14d for direct deposit into a checking or savings account at a U.S. bank or other financial institution. These direct-deposit lines were added to Form 8804 for the current revision.

The IRS recommends direct deposit when the partnership has access to U.S. banking services, but the current instructions still describe a check option. Do not guess at routing or account information; use the financial institution's details and review the current instructions before filing.

Foreign owners who need a suitable U.S. business account can see our U.S. bank-account guide before choosing the refund option. Read the current IRS Form 8804 instructions for the exact fields and eligibility.

Partner Statements — Form 8805

The partnership prepares Form 8805, “Foreign Partner’s Information Statement of Section 1446 Withholding Tax,” for each partner for whom it paid Section 1446 tax. A Form 8805 is also required in specified no-payment cases when the partnership used a permitted state or local income-tax reduction or relied on Form 8804-C. Form 8805 shows the partner’s ECTI and withholding credit; the IRS copy attaches to Form 8804, and the partner copy is generally due by the partnership-return due date, including extensions.

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
• A trust fund recovery penalty can reach a responsible person who willfully fails to collect, account for, or pay over the trust-fund portion; it is not automatic personal liability for every mistake

Interaction with Form 1065 and K-1

Section 1446 withholding is closely tied to Form 1065. The partnership provides a statement, generally Schedule K-1 and any required attachment, listing the types of ECTI included in the Form 8805 calculation. Form 8805 reports the foreign partner’s ECTI and Section 1446 withholding credit. Reconcile the allocations and income categories across Form 1065, the partner statements, Form 8804, Forms 8813, and each Form 8805; do not rely on an outdated K-1 box code as proof of the credit.

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

The partnership should collect and report each foreign partner’s U.S. taxpayer identification number when one has been issued. For an individual, that is generally an SSN or ITIN; for a foreign entity, it is generally an EIN. A partner-level U.S. return or a claim for the Form 8805 withholding credit ordinarily requires a valid identifying number, so the need should be addressed before the filing deadline.

Related Tools