Uncle Sam Meets Uncle Scrooge — The Temporary Regulations on Foreign Partner Withholding (Part 2)
16 Journal of International Taxation 32 (December 2005)
13 Pages Posted: 14 Jul 2015
Date Written: December 1, 2005
Section 1446 requires the withholding of tax by partnerships with foreign partners where the partnership has income or gain that is effectively connected with a trade or business carried on by the partnership within the United States (ECI). The final Regulations implement this simple-sounding concept relentlessly and humorlessly. In particular, the final Regulations interpret the statute to require that in computing the effectively connected taxable income (ECTI) on which tax is to be withheld, the deductions that a partner may be entitled to at the partner level are to be ignored. This rule essentially guarantees that the '1446 tax,' as it is referred to in the Regulations, will almost always be greater than the foreign partner's actual tax — indeed in some cases the partnership will pay a substantial 1446 tax when no tax at all is due by the partner.
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