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Ask Lane Your Own Question
Category: Tax
Satisfied Customers: 12459
Experience:  Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986
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I am trying to figure out whether a tax withholding is required

Customer Question

I am trying to figure out whether a tax withholding is required in a US LLC for a partner in France
Submitted: 2 years ago.
Category: Tax
Expert:  Lane replied 2 years ago.
Hi,.Whether or not withholdiong may be required depends on whether the French Partner is determined to have Permanenet establishment (a business presence by virtue of his partnership activities)..If the partnership is engaged in a U.S. trade or business, a nonresident partner is treated as if he or she is so engaged. This is true whether the nonresident is a general or limited partner..Nonresident partners are subject to regular U.S. income tax on their share of partnership income derived from a U.S. trade or business, but MAY NOT be subject to the forced withholding, IF the partner does not have a P.E.,“permanent establishment.” in the U.S. by virtue of the activities of the partnership. .The most recent protocol (revision) to the US/France tax treaty provided some clarification as to when a partner would have Effectively connected income and thereby be subject to withholding..The Protocol clarifies that, in determining whether a person is “engaged in the active conduct of a trade or business” for this purpose, activities conducted by a person “connected” to the taxpayer will be attributed to the taxpayer. A person shall be connected to another person for this purpose if one possesses at least 50% of the beneficial interest in the other (or, in the case of a company, at least 50% of its beneficial interest, by vote and value), or another person possesses, directly or indirectly, at least 50% of the beneficial interest (or, in the case of a company, at least 50% of the beneficial interest, by vote and value) in each person, or if, based on all the relevant facts and circumstances, the persons are under common control. .What this measn is that if the French Partner does not pass this test (essentially, does not have at least 50% beneficial interest by vote and value - look to the oerating agreement) - then the French partner can provide a W8-Ben to the partnership (LLC) and claim the beneficial ownership of the items if income and hence the tax treaty benefits.. the individual does not pass the test and DOES have ECI, Income effectively connected with a U.S. trade or business is reported by the individual nonresident partner on a U.S. Individual Nonresident Income Tax Return (Form 1040-NR). This will allow for a refund from the forced withholding, likley higher than the tax laibility itself, because Withholding is at the highest rate for partnerships - 39.6% - but the actual tax is levied at the same graduated rates received by U.S. persons..Let me know if you have questions ....Lane.