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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22619
Experience:  Taxes, Immigration, Labor Relations
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c corporation has a 50 % active foreign partner in Canada.

Resolved Question:

c corporation has a 50 % active foreign partner in Canada. What forms will be needed to withhold and pay taxes on behalf of foreign partner? All the work get done in USA, all income come comes to US banks.
Submitted: 1 year ago.
Category: Tax
Expert:  Lev replied 1 year ago.

LEV :

Hi and welcome to Just Answer!
"active foreign partner" - do you mean you have a partnership with a nonresident alien or a nonresident alien owns shares of C-corporation or a nonresident alien is an employee of C-corporation?

Customer:

my client wants to have a c corporation which has a foreign partner of 50%. (right now this client has partnership, they withhold and pay 35% tax on the distribution and use form 8804).

LEV :

I am still not clear - do you want to have a partnership - when one partner is a C-corporation and another partner is a nonresident alien - is that correct?

Customer:

sorry to confuse you.

Customer:

i read that C corporation can have a foreign partner. my client wants to incorporate as C corporation which has two partners, one partner lives in US and the other 50% partner lives in Canada. 50% of profits will be distributed to foreign partner, what forms need to be used to withhold and pay taxes to this foreign partner.

LEV :

or you simply want a nonresident alien to own shares of C-corporation?

LEV :

In this case - there is no partnership - but we will have a corporation - with two shareholders - one US shareholder and another shareholder who is a nonresident alien.
Shareholders receive dividends out of C-corporation.
Dividends are reported on form 1099DIV.

Customer:

can a foreign partner be paid as an employee

Customer:

US partner will be on payroll.

LEV :

There is a tax treaty between the US and Canada - according to that tax treaty dividends paid by US corporations to Canadian residents are subject of reduced withholding - 15% for regular dividends and 5% for qualified dividends.

LEV :

Yes - shareholders may be employees of C-corporation - that is a separate issue.

Customer:

so you are saying that they don't have to deal with 35% withholding.

Customer:

how can a foreign partner have a payroll?

LEV :

Withholding on employees is the same - and based on the place of employment.
If all the work is done in USA - wages are subject of US withholding and also subject of state withholding.

Customer:

foreign partner lives in Canada and manages the business from there.

LEV :

In additional - according to the US-Canada income tax treaty - Income from employment (Article XV) - wages up to $10,000 are exempt from US federal taxes.

Customer:

so if foreign partner gets dividends, and the other US partner is on Payroll, do you know how could this be managed?

LEV :

foreign partner lives in Canada and manages the business from there.
You originally stated that all the work is done in USA - now you are giving a contradicting statement - "foreign partner lives in Canada and manages the business from there"
The later actually means - that C-corporation runs business in Canada - and if that is correct - it should be registered there according to Canadian business laws and will be responsible for Canadian taxes.

Customer:

please let me know where i could be able to read more about this situation in IRS codes, so that i could better understand it.

LEV :

so if foreign partner gets dividends, and the other US partner is on Payroll, do you know how could this be managed?
These are two separate and not related issues.
If the person works for the corporation - he/she received wages.
If the corporation pays dividends - such dividends are paid out of corporate income (after taxes) - and each shareholder gets dividends according to number of shares he/she owns.

Customer:

foreign partner lives in Canada, all the work gets done in US, they import stuff from India and sells to US retailers.

LEV :

please let me know where i could be able to read more about this situation in IRS codes, so that i could better understand it.
If you are looking for the tax law related to corporations - I might suggest to start with this IRS publication - http://www.irs.gov/pub/irs-pdf/p542.pdf

Customer:

please let me know where i could be able to read more about this situation in IRS codes, so that i could better understand it.

Customer:

thank you Lev.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22619
Experience: Taxes, Immigration, Labor Relations
Lev and 7 other Tax Specialists are ready to help you

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