IRS recently clarified the withholding rate for the effectively connected income (ECI) allocated to foreign partners. As readers may be aware. IRC 1446 withholding rate was increased from 35% to 39.6% effective 2013. However, there was a confusion if the new rate on ECI would apply if teh partnership’s tax year was a fiscal year beginning in 2012.
IRS Ann. 2013-30, 2013-21IRB clarifies that since partnerships with fiscal years beginning in 2012 are required to file a 2012 Form 8804 (Annual Return for Partnership Withholding Tax), 2012 tax rates continue to apply. However, IRS announcement further states that a foreign partner will still be liable for tax on their share of the partnership’s income based on the tax rates in effect when included in income.