Withholding rate on Foreign partner’s ECI clarified

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.

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