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Christopher Phelps
Christopher Phelps, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 2710
Experience:  CPA, CFP, PFS, Tax Practitioner 21 Years, Member AICPA/CSCPA Tax/Financial Planning Committee Member
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foreign partner tax liability

Customer Question

I am currently looking to setup a Delaware LLC with a foreign partner located in Ukraine. I am a U.S. citizen. Each partner would have a 50% controlling interest in the company.

Profits will be distributed on a monthly basis to partners on a monthly basis.

I realize that I must pay my share of taxes on my portion of profits. Does the foreign partner also have to pay U.S. taxes on his portion of profits even though he is not a U.S. citizen and will have to pay Ukraine taxes on this income?

If so, is it the responsibility of the LLC to handle this or is it the responsibility of the foreign partner?

Submitted: 11 years ago.
Category: Tax
Expert:  Christopher Phelps replied 11 years ago.

As a general rule all foreign persons must pay tax on income that is sourced in the U.S.  In your case the question is how much?  The answer depends on numerous factors to lengthy to discuss here.  In brief, you need to determine first if the U.S. has a tax treaty with the foreign person's country, next you need to determine if the foreign person is "engaged in a trade or business" in the U.S. through your partnership and finally whether the income generated by the partnership is "effectively connected" income. 


All these issues are determined by the specific facts of your situation including whether the foreign person will provide services, to what extent will they be involved in management, will they make trips here to the U.S.  or is the person just a silent investor. 


The botXXXXX XXXXXne is that yes, the LLC will be required to withhold taxes of the foreign person's allocable income.  If the foreign person is deemed to not be engaged in a trade or business in the U.S. and that the income is not effectively connected with a U.S. business then withholding on payments to the foreign person will generally be 30% of the payment.  If the foreign person is engaged in a trade or business and the income is effectively connected then the withholding will be as high as 35%.  If a treaty is in place then this withholding may be significantly reduced or eliminated. 


This area of the law is very complex and completely fact driven by each specific situation.  I would advise you sit down with competent counsel (i.e. tax attorney or CPA) to determine how the law applies to your LLC.  This is important because the partnership (or you personally) can be held liable for any required withholding that is not remitted to the IRS

 

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