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Wednesday, April 30, 2008


Under Internal Revenue Code Section 1446, foreign partners of a partnership that is engaged in a U.S. trade or business are subject to withholding of taxes attributable to their allocable share of the effectively connected income of that partnership. This can be unfair to a partner who would not have to pay taxes on that income due to other deductions available to the partner.

In the spirit of fairness, the IRS has issued final regulations allowing the partner to certify available deductions to the partnership, so as to reduce the amount of tax that must be withheld. The IRS doesn't freely give out this benefit - it requires that the taxpayer have filed returns for the prior 3 years for the first time it files, and has specific certification requirements.

Some of the highlights of the final regulations include:

a. A protective return of the partner is not a "return" for purposes of the filing requirements for prior years;

b. Foreign estates and their beneficiaries, and trusts that are not grantor trusts, cannot use these rules;

c. There are special limitations that apply to tiered partnerships;

d. The rules do not apply to partners of a publicly-traded partnership;

e. A provided certificate can only have a prospective effect;

f. The certificate does not effect the estimated tax obligations of the foreign partner;

g. The certificate does not affect the obligations of the partner to file a U.S. income tax return; and

h. The partnership must attach copies of the certificates received to its Section 1446 filings with the IRS.

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