If I was to form an LLC with a foreign partner what would be the best tax strategy? Or is there anything I need to be aware of?=======>An LLC/ partnership ,foreign or domestic, that has income effectively connected with a U.S. trade or business or income treated as effectively connected must pay a withholding tax on the effectively connected taxable income that is allocable to its foreign partners;as your LLC has a foreign partner , you may need to pay a withholding tax on that partner. A foreign partner/person includes nonresident aliens, foreign corps, foreign partnerships, and foreign trusts or estates. Your LLC must pay the withholding tax regardless of the foreign partner’s ultimate U.S. tax liability for the year and even if the LLC did not make any distributions during the year. A publicly traded partnership must withhold tax on actual distributions of effectively connected income, unless it chooses to withhold under special Rules Applicable to Publicly Traded Partnerships.This withholding tax regime does not apply to income that is not effectively connected with the partnership's U.S. trade or business The foreign partner may file form W8BEN; Form W-8BEN is an appropriate form for the partner to use. The form establishes that the partner is not a US citizen or an owner or foreign partner receiving a beneficial share in the income for which Form W-8BEN is being provided. The partner also can use it to claim a tax exemption or reduced rate of taxation due to a tax treaty between the US and his foreign country. So, a non-US person ,whether an individual or a foreign entity, will receive any of these certain types of income, he must provide the Form W-8BEN directly to the payor of the income , NOT to the IRS, to establish that he is not a US person and to claim that he is the beneficial owner of the income. Form W-8BEN must be signed and dated by the beneficial owner of the income, or, by an authorized representative as evidenced by a duly completed Power of Attorney.
The withholding tax must be paid on a quarterly basis, before the 15th day of the apr, june, sep , and jan months of the partnership’s tax year. Therefore, the partnership should review the allocable foreign partner’s share of taxable income throughout the year and pay the withholding tax accordingly to avoid any penalties at year end. You need to contact your state rev dept for state annual return form for withholding on your foreign partner.